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Written by Stefon Walters for The Motley Fool->
Nine states don't have any form of income tax -- which should please their residents.
What's more, most states don't tax Social Security income.
But federal tax rules apply to everyone regardless of your state's specific rules.
One of the more important decisions someone makes as they near retirement is where to retire. Of course, factors like weather and proximity to family are important. But so are the financial implications and potential treatment you'll receive in various states.
If you want your retirement nest egg to last as long as possible, saving money wherever you can (especially on taxes) is never a bad idea. Tax benefits vary by state, but if you're looking for the most tax-friendly options, consider the following 13 that don't tax retirement income.
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Nine states in the U.S. don't have any income tax, regardless of the type. This includes your typical paycheck, capital gains (in most cases), and retirement income. The nine are:
Four states tax regular income but give special exemptions to retirement income, such as 401(k)s, IRAs, and pensions:
There are also plenty of states aside from these 13 that technically tax retirement income, but offer attractive tax breaks and thresholds that save lower-income retirees from paying taxes.
For example, in Arkansas, up to $6,000 annually is exempt from individual retirement account (IRA) distributions and employer-sponsored pension plans. In South Carolina, seniors age 65 and older can deduct up to $15,000 from any taxable income.
As of this year, there are 42 states and Washington, D.C. that don't tax Social Security benefits. These eight states are the exception:
West Virginia used to tax Social Security benefits, but was the most recent state to phase out the tax, beginning this tax year.
Regardless of your state's specific tax rules, you're still subject to federal tax rules. Even if you live in one of the nine states with no income tax, you'll still owe federal income taxes. The same applies to taxes on your Social Security benefits. How much you potentially owe depends on your combined income. It's the combination of your adjusted gross income (AGI), half of your annual Social Security benefit, and any nontaxable interest you receive.
If you're single and your combined income is less than $25,000, none of your benefits are eligible to be taxed. If it's between $25,000 and $34,000, up to 50% are eligible; if it's more than $34,000, up to 85%.
If you're married and filing jointly and your combined income is less than $32,000, none of your benefits are eligible to be taxed. If it's between $32,000 and $44,000, up to 50% are eligible; if it's more than $44,000, up to 85%.
The amount of your Social Security benefits eligible to be taxed is added to your other income and then taxed at your normal income tax rate.
Tax treatment is an important part of retirement planning and potential relocation, but it shouldn't be the only consideration or the most important consideration. Admittedly, the financial difference between a "tax-friendly" and "not-so-tax-friendly" state could be thousands annually, but those savings can easily be offset by higher costs in other areas or higher other types of taxes.
States like Washington and Alaska don't have income taxes, but their cost of living is higher than the U.S. average. New Hampshire and Texas don't have income taxes, but their property taxes are higher than average. If you're going to own a home, then you might not be saving as much as you think.
There's also healthcare to consider, which is typically one of retirees' largest expenses. Not only do healthcare costs vary by state, but quality can also depend heavily on your location. Even if you're saving money, sometimes the trade-off with quality isn't worth it.
When you're deciding where to retire, make sure it's a holistic decision that also considers non-financial factors.
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