You did all your research before moving to a new state for retirement; you checked the cost of living expenses, made plans with your financial advisor for long-term spending goals, got a great deal on where you’ll live, and are happy with the tax options in your new home. But you weren’t aware of the complex state tax laws that are now eating into your nest egg. Here are some of the state laws blindsiding retirees.
Related: 20 Inspiring Ideas to Make the Most of Your Retirement Bucket List
States That Tax Social Security
Colorado, Connecticut, Minnesota, Montana, New Mexico, Rhode Island, Utah, Vermont, and West Virginia still tax Social Security benefits, although West Virginia is currently phasing that out so all 2026 returns will be completely exempt.
While WV moves away from the tax, Minnesota is actually a sleeper offender, taxing Social Security, pensions, and all forms of retirement income. The top income tax rate in the state is 9.85%, and the lowest is 5.35%, according to Kiplinger.
While Minnesota doesn’t offer tax breaks for lower-income retirees, Connecticut does exempt lower earners. Single filers under $75,000 AGI are exempt, which still covers a large part of the population.
The Pension & Retirement Income Trap
No income tax doesn’t always mean no retirement income tax. Some states tax pensions or 401(k) withdrawals even with no broad income tax. California, for example, taxes retirement income, including private and public pensions plus 401(k) accounts, at up to 13.3%, but doesn’t tax Social Security benefits. StateByStateTax notes that the Golden State receives a poor rating for retirees.
On that same page, we learn that Oregon doesn’t have any sales tax, but does collect up to 9.9% from retirement and pension accounts. It’s no wonder that some retirees choose to sell their equity-rich homes on the West Coast and head to more tax-friendly states.
On the plus side, one of those places they could migrate to is Michigan. Starting with the 2026 tax year, the Great Lakes State will have effectively phased out state income tax on most retirement and pension benefits, including defined-benefit pensions, IRA distributions, and other qualifying retirement income, reports Kiplinger.
Related: Why Retirees Are Leaving Florida for These ‘Halfback States’ — and Never Looking Back
The Inheritance & Estate Tax Surprise
Inheritance and estate tax isn’t something many retirees think about until it’s too late. You worked hard to leave something to your loved ones, and you want them to be able to use as much of it as possible.
Currently, 12 states plus D.C. levy their own estate taxes, and six states levy an inheritance tax. Maryland does both, but it’s not the only state with a surprise for residents. Oregon, for instance, has the lowest estate tax exemption in the country at just $1 million, meaning retirees with a home and modest savings can find themselves caught in the net.
Furthermore, Kiplinger reportd that Massachusetts estate taxes can jump as high as 16%, with an exemption of only $2 million for 2025, meaning many middle-class homeowners get caught.
Property Tax Is The Hidden Fixed-Income Killer
Property tax is often overlooked because it isn’t a form of income that’s typically considered when figuring out state taxes for retirement. However, people who are “house rich” but on a fixed income could get hit especially hard.
States like New Jersey and Illinois have property tax rates of 2.13% and 2.07%, respectively, which can hit a retiree hard. In fact, property taxes can completely negate income tax exemptions, making it expensive to stay retired in the state.
On the plus side, many states actually offer senior property tax relief programs. You have to apply, and there are income caps, but it’s worth looking into to see if your state has the program and if you qualify.
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More Than Just Income Tax
Deciding where to retire requires looking beyond income tax alone. While states like Florida and Texas seem great because of their no-income-tax policies, other factors can completely negate the savings. When you’re making plans, you need to look at all of the factors that will contribute to your overall quality of life.
It’s your money, and you worked hard for it; you deserve to keep as much of it as possible.
Disclaimer: This article is for informational purposes only and does not constitute advice.
Sources
- CNBC Select — “These 13 States Don’t Tax Social Security, 401(k) Accounts, IRAs or Pensions”
- Kiplinger — “Retirement Taxes: How All 50 States Tax Retirees”
- Kiplinger — “The 8 States That Tax Social Security Retirement Income in 2026”
- StateByStateTax — “Retirement Tax by State 2026 — Best & Worst States for Retirees”
- SmartAsset — “Best States to Retire for Taxes (2026)”
- RetirementLiving.com — “Taxes by State 2026”
- Income Lab — “State Taxes in Retirement: The Complete Advisor Guide (2026)”
- Rocket Mortgage — “Property Tax Relief for Seniors”