Tax-Friendly States to Consider, and Which to Forget

Wyoming is frequently ranked the most tax-friendly state in the country, and it's easy to see why. There's no state income tax at all, so Social Security, pensions, and 401(k) and IRA withdrawals go untaxed, and combined state and local sales taxes are low, generally under 6 percent. Property taxes are modest, and there's no estate or inheritance tax. Pair that with a low cost of living and Wyoming is a strong pick for families and retirees alike.

Illinois often lands near the bottom of state tax-friendliness rankings, largely because of property taxes that are among the highest in the country, second only to New Jersey. It charges a flat 4.95 percent income tax, and combined state and local sales taxes can climb past 10 percent in some areas. One bright spot, especially for retirees: Illinois doesn't tax retirement income, including Social Security, pensions, and 401(k) and IRA withdrawals. But for working households, the overall burden is heavy.

Nevada has no state income tax, so none of your wages or retirement income is taxed at the state level, and property taxes are on the low side. The trade-off is a relatively high sales tax, though groceries are exempt. There's no estate or inheritance tax either, which rounds out a generally friendly picture for both families and retirees.

Connecticut is a pricey place to settle. Its income tax runs on a graduated scale from 2 percent to nearly 7 percent, and property taxes are among the highest in the nation. The state also levies an estate tax and is the only state with a gift tax. There are some breaks for retirees, Social Security is exempt below certain income levels and being phased out further, but overall Connecticut leans expensive.

Florida's lack of a state income tax is a big draw, and it means no state tax on Social Security or other retirement income. Property and sales taxes land in the middle of the pack, and there's no estate or inheritance tax. Those features have long made Florida a favorite for retirees.

Iowa used to have a reputation as a high-tax state, with steep income tax rates and a tax on most retirement income. That has changed substantially. Iowa now has a flat 3.8 percent income tax, exempts retirement income for residents 55 and older, and eliminated its inheritance tax for 2025 and beyond, moves that put it among the more tax-friendly states today, especially for retirees. Property taxes remain on the higher side, so it isn't tax-free, but the overall picture is far friendlier than its old reputation suggests.

Tennessee is one of the friendlier states despite having one of the highest combined sales tax rates in the country. The reason is its lack of an income tax. The old tax on dividends and interest was fully phased out in 2021, so wages and retirement income, including Social Security, go untaxed. Property taxes sit below the national average, and there's no estate or inheritance tax.

New Jersey carries a high cost of living and the highest property taxes in the country. Its income tax is graduated, reaching 10.75 percent for top earners, and Newark adds a local payroll tax. There are upsides: Social Security isn't taxed by the state, retirees can exclude a large share of their retirement income, and the state eliminated its estate tax in 2018, though it keeps an inheritance tax. Sales taxes are also below average. Whether the trade-offs are worth it depends on what you value.

Alaska has no state income tax and is one of only a handful of states with no statewide sales tax, though some localities add a small local one. Retirement income is untaxed. Property taxes run a bit above the national average, and the cost of living is high given how remote the state is, but Alaska is also the only state that pays residents an annual Permanent Fund Dividend, which softens the blow.

New York's income tax is middle-of-the-road for most earners but climbs steeply at higher incomes, and some cities, including New York City, add their own local income tax. Property taxes are among the highest in the nation. There are meaningful breaks for retirees, though: Social Security isn't taxed, government and military pensions are exempt, and other retirees can exclude up to $20,000 of retirement income. For many, the question is whether the lifestyle justifies the cost.