Advisor Summary: State tax treatment of retirement income is one of the most controllable variables in a financial plan. Nine states have no income tax, 13 fully exempt retirement distributions, and only eight still tax Social Security. But income tax is only part of the picture: property taxes, sales taxes, and estate taxes can offset or reverse the benefit of “no income tax” states. This guide covers all 50 states’ treatment of retirement income in 2026, with the exemption thresholds and planning opportunities that matter most.
Two retirees. Same $120,000 annual income. Same asset allocation, same Social Security benefit, same pension. One lives in Wyoming. The other lives in California. According to the Tax Foundation’s 2026 State Tax Handbook, the California retiree pays roughly $7,200 more in state income tax every year. Over a 25-year retirement, that difference compounds to more than $180,000 in after-tax spending capacity.
State tax treatment of retirement income is one of the most controllable variables in a retirement cash flow planning process. Your clients can’t control market returns or federal tax law. But they can choose where they live, and that decision carries six-figure consequences that most plans fail to quantify.
This guide covers how all 50 states treat retirement income in 2026: which states have no income tax, which exempt Social Security and pensions, where the partial exclusions and phase-outs create planning opportunities, and where the combined tax burden hits retirees hardest. Every number is sourced from state revenue departments and the Tax Foundation.
The 9 States With No Income Tax
The simplest category. According to the Tax Foundation’s 2026 State Income Tax Rates and Brackets report, nine states levy no individual income tax on any income type, including wages, pensions, Social Security, 401(k) distributions, and IRA withdrawals:
| State | Sales Tax (State Rate) | Avg. Property Tax Rate | Estate/Inheritance Tax |
|---|---|---|---|
| Alaska | 0% | 1.04% | None |
| Florida | 6.0% | 0.91% | None |
| Nevada | 6.85% | 0.55% | None |
| New Hampshire | 0% | 1.57% | None |
| South Dakota | 4.2% | 1.08% | None |
| Tennessee | 7.0% | 0.54% | None |
| Texas | 6.25% | 1.60% | None |
| Washington | 6.5% | 0.87% | Estate tax (exemption ~$2.2M) |
| Wyoming | 4.0% | 0.55% | None |
Note: New Hampshire repealed its Interest and Dividends Tax effective January 1, 2025, making it fully income-tax-free. Washington levies a 7% capital gains tax on gains exceeding $270,000, but this does not apply to retirement account distributions.
What advisors miss: No income tax does not mean no tax burden. According to the Tax Foundation’s Facts and Figures 2025, Texas and New Hampshire have some of the highest property tax rates in the country. Data from the Texas Comptroller of Public Accounts shows a retiree with a $500,000 home in Texas pays approximately $8,000 per year in property taxes alone. The Tennessee Department of Revenue reports a 9.6% average combined sales tax rate (state plus local), the second highest in the nation according to the Tax Foundation. The right comparison is total effective tax burden, not just income tax.
Advisor takeaway: When a client asks about “no income tax” states, always model the total tax burden including property and sales taxes. A no-income-tax state with high property taxes can cost a homeowner more annually than a low-income-tax state with modest property taxes. Use Income Lab’s Tax Lab to compare states side by side with your client’s actual income sources.
The 13 States That Don’t Tax Any Retirement Distributions
Beyond the nine no-income-tax states, four additional states have income taxes but fully exempt retirement account distributions (401(k), IRA, and pension income):
| State | Income Tax Rate | What’s Exempt | Key Details |
|---|---|---|---|
| Illinois | 4.95% flat | All retirement income | Pensions, 401(k), IRA, Social Security fully exempt |
| Iowa | 3.9% flat | All retirement income | Effective 2023; pensions, 401(k), IRA, Social Security exempt |
| Mississippi | 4.0% flat | All retirement income | Qualified distributions exempt; early withdrawals may be taxed |
| Pennsylvania | 3.07% flat | All retirement income | Pensions, 401(k), IRA, Social Security exempt after age 59 1/2 |
Sources: Illinois Revenue (35 ILCS 5/203), Iowa Department of Revenue, Mississippi Department of Revenue, Pennsylvania Department of Revenue
These four states are underappreciated in relocation conversations. Per the Illinois Department of Revenue (35 ILCS 5/203), Illinois has a 4.95% income tax on wages, but a retiree drawing entirely from Social Security, a pension, and IRA distributions pays 0% state income tax. The Pennsylvania Department of Revenue similarly exempts all retirement income after age 59 1/2 under its 3.07% flat tax. That’s a meaningful distinction for pre-retirees evaluating whether to stay in-state after leaving employment.
States That Tax Social Security Benefits (Only 8 Remain)
According to the Social Security Administration, approximately 72.5 million Americans received Social Security benefits in 2025. As recently as 2020, thirteen states taxed Social Security. For advisors helping clients navigate Social Security claiming strategies, that number has dropped to eight for 2026, and most of the remaining states offer substantial exemptions:
| State | How Social Security Is Taxed | Exemption Details |
|---|---|---|
| Colorado | Partially taxed | Ages 55-64: $20,000 exclusion. Ages 65+: $24,000 exclusion. New for 2026: SB25-136 removes all pension caps; Social Security caps expanding. |
| Connecticut | Partially taxed | Full exemption if AGI below $75,000 (single) / $100,000 (joint). Above thresholds, up to 25% of benefits taxed. |
| Minnesota | Partially taxed | State subtraction phases out starting at ~$84,490 (single) / ~$108,320 (joint), indexed for inflation. |
| Montana | Partially taxed | Deduction of $5,500 (single) / $11,000 (joint) from AGI. Additional exemption up to $20,000 if income exceeds threshold. |
| New Mexico | Partially taxed | Full exemption if AGI below $100,000 (single) / $150,000 (joint). Fully taxed above thresholds. |
| Rhode Island | Partially taxed | Exempt if at full retirement age AND AGI below $107,000 (single) / $133,750 (joint). |
| Utah | Credit offset | Nonrefundable credit offsets tax; phases out above $54,000 (single) / $90,000 (joint) MAGI. |
| Vermont | Partially taxed | Full exemption if AGI below $55,000 (single) / $70,000 (joint). Partial exemption phases out above. |
Sources: State revenue departments; Kiplinger “States That Tax Social Security Benefits” (2026 edition); Tax Foundation
Recent eliminations: According to the Tax Foundation, Missouri, Kansas, and Nebraska eliminated their Social Security taxes in 2024. The West Virginia State Tax Department confirmed completion of its phaseout in 2026. The legislative trend is clear and accelerating.
The planning angle: For clients in these eight states, the exemption thresholds create effective marginal rate cliffs. A Connecticut couple at $99,000 AGI pays zero state tax on Social Security. At $101,000, up to 25% of benefits become taxable. That $2,000 of additional income can generate several hundred dollars of additional state tax. This is exactly the kind of interaction that shows up in proper tax projection modeling and gets missed in rules-of-thumb planning.
Advisor takeaway: For clients in the eight states that still tax Social Security, check whether their AGI falls near an exemption threshold. Managing income to stay below the cutoff (for example, by sizing a Roth conversion to avoid crossing the line) can save hundreds to thousands per year in state taxes. These threshold effects interact with federal IRMAA brackets, so model both layers together.
States That Don’t Tax Pension Income (16 Total)
Sixteen states fully exempt defined benefit pension income from state income tax. This includes the nine no-income-tax states plus seven additional states with income taxes:
| State | Income Tax Rate | Pension Treatment |
|---|---|---|
| Alaska | None | Fully exempt (no income tax) |
| Florida | None | Fully exempt (no income tax) |
| Nevada | None | Fully exempt (no income tax) |
| New Hampshire | None | Fully exempt (no income tax) |
| South Dakota | None | Fully exempt (no income tax) |
| Tennessee | None | Fully exempt (no income tax) |
| Texas | None | Fully exempt (no income tax) |
| Washington | None | Fully exempt (no income tax) |
| Wyoming | None | Fully exempt (no income tax) |
| Alabama | 2%-5% | All pension income exempt; 401(k)/IRA exempt up to $12,000 (age 65+, doubled for 2026) |
| Hawaii | 1.4%-11% | Employer-funded pension distributions exempt; employee contributions taxed on gains only |
| Illinois | 4.95% flat | All pension income exempt |
| Iowa | 3.9% flat | All pension income exempt |
| Mississippi | 4.0% flat | All pension income exempt |
| New York | 4%-10.9% | Government pensions fully exempt; private pensions: first $20,000 exempt (age 59 1/2+) |
| Pennsylvania | 3.07% flat | All pension income exempt |
Sources: Kiplinger “States That Don’t Tax Pension Income” (2026); state revenue department publications
New York’s split treatment matters. Per the New York Department of Taxation and Finance, a retired teacher or police officer with a state pension in New York pays zero state tax on that income. A retired corporate employee with a defined benefit pension from a private employer gets only a $20,000 exclusion (pending legislation would raise this to $30,000 for 2026). Same state, same type of income, very different tax treatment. If your client has both government and private pension income, the ordering and classification of each stream affects the total state tax liability.
States With Partial Retirement Income Exclusions
Several states tax retirement income but provide partial deductions or exclusions. These create planning opportunities because the thresholds interact with other income decisions:
| State | Exclusion / Deduction | Key Details |
|---|---|---|
| Alabama | $12,000 (age 65+) | Applies to 401(k)/IRA distributions; pensions fully exempt |
| Colorado | $20,000 (ages 55-64); $24,000 (65+) | 2026 change: pension caps removed entirely via SB25-136 |
| Georgia | Up to $65,000 (single, age 62+); $130,000 (joint) | Applies to all retirement income including Social Security, and up to $4k/person of earned income |
| Kentucky | Up to $31,110 | Applies to pension, IRA, 401(k) income |
| Michigan | ~$65,987 (single); ~$131,794 (joint) | Phase-in complete for 2026; applies to pensions and retirement income |
| New York | $20,000 (private pensions, age 59 1/2+) | Government pensions fully exempt |
| South Carolina | Up to $10,000 | Retirement income deduction for qualifying distributions |
| Virginia | Age deduction up to $12,000 (age 65+) | Plus Social Security fully exempt |
Sources: State revenue departments; Tax Foundation state tax data (2026)
Michigan’s 2026 completion deserves attention. According to the Michigan Department of Treasury, Michigan has been phasing in its retirement income exemption over several years. For the 2026 tax year, the phase-in is complete: qualifying pension and retirement income is fully deductible up to $65,987 (single) or $131,794 (joint). A retired Michigan couple drawing $130,000 from pensions and IRAs effectively pays no state income tax on that income, despite Michigan’s 4.05% rate. If you have Michigan clients who haven’t updated their state withholding, they may be significantly over-withholding.
Flat Tax States: Simpler Planning, Fewer Surprises
According to the Tax Foundation’s 2026 State Income Tax Rates and Brackets, fifteen states use single-rate (flat) income tax structures as of 2026, up from eleven in 2020 as states continue converting from graduated to flat structures. For retirement planning, flat taxes simplify state-level projections because there are no bracket interactions to model:
| State | 2026 Flat Rate | Retirement Income Notes |
|---|---|---|
| Arizona | 2.5% | Taxes all retirement income; Social Security exempt |
| Colorado | 4.4% | Partial exclusions (see above); pension caps removed for 2026 |
| Georgia | 5.09% | Generous retirement exclusion ($65,000 single / $130,000 joint, age 62+) |
| Idaho | 5.695% | Social Security exempt; other retirement income taxed |
| Illinois | 4.95% | All retirement income exempt |
| Indiana | 2.95% | Social Security exempt; other retirement income taxed |
| Iowa | 3.9% | All retirement income exempt |
| Kentucky | 3.5% | $31,110 exclusion on retirement income |
| Louisiana | 3.0% | Social Security exempt; federal retirement exempt |
| Michigan | 4.05% | Large retirement income deduction (see above) |
| Mississippi | 4.0% | All retirement income exempt |
| North Carolina | 3.99% | Social Security exempt; other retirement income fully taxed |
| North Dakota | 2.5% | Social Security exempt; other retirement income taxed at low rate |
| Ohio | 2.75% | No tax on income below $26,050; Social Security exempt |
| Pennsylvania | 3.07% | All retirement income exempt |
Sources: Tax Foundation “2026 State Income Tax Rates and Brackets”; state revenue departments
The planning benefit of flat-tax states: In graduated-rate states, a Roth conversion or large IRA distribution can push a client into a higher state bracket, creating a compounding effect on top of the federal bracket impact. In flat-tax states, the state marginal rate is constant regardless of the distribution size. This makes Roth conversion strategy optimization simpler and the after-tax outcome more predictable.
Watch out for “Bracket Creep”
A hidden cost in some states’ income tax system is inflation: states that do not update tax bracket thresholds, deduction and exemption amounts, and/or AGI phaseouts effectively increase taxes every year as inflation eats into purchasing power. For example, a $10,000 deduction in 2026 is worth only $7,300 in constant dollars ten years later.
Fifteen states are major offenders with bracket creep: Alabama (AL), Kentucky (KY), Connecticut (CT), Delaware (DE), Hawaii (HI), Indiana (IN), Kansas (KS), Maryland (MD), New Jersey (NJ), New Mexico (NM), New York (NY), Oregon (OR), Virginia (VA), Vermont (VT), West Virginia (WV).
However, even states not on this list may have values that are not adjusted for inflation, and so where inflation will slowly increase effective tax rates.
Bracket creep and inflation treatment is not particularly important when evaluating this year’s state taxes. However, in a long-term retirement plan this becomes very important. So, be sure your retirement planning software properly handles long-term tax estimates by properly modeling inflation (or lack thereof).
Of course, there are even places in federal income tax system that are not adjusted for inflation, and therefore subject to bracket creep: Social Security taxability thresholds and net investment income tax (NIIT) thresholds are stated in nominal terms only by statute, and so in real (inflation adjusted) terms, more and more of this income becomes taxable as the years go on.
States With the Highest Tax Burden for Retirees
For clients evaluating relocation or simply understanding how much of their retirement income goes to state and local taxes, these states consistently rank as the most expensive:
California
- Top income tax rate: 13.3% (includes the 1% “Mental Health Services Tax” on high earners), per the California Franchise Tax Board
- Retirement income: Fully taxed (except Social Security)
- Property tax: ~0.71% (Prop 13 caps, but reassessment on purchase). According to the California State Board of Equalization, Proposition 13 limits annual assessed value increases to 2%, which benefits long-term homeowners
- Combined sales tax: Up to 10.75% in some counties per the California Department of Tax and Fee Administration
- A retiree drawing $150,000 from IRAs and pensions faces roughly $8,500-$10,000 in state income tax alone
New York
- Top income tax rate: 10.9% (plus NYC surcharge up to 3.88%), per the New York Department of Taxation and Finance
- Retirement income: Private pensions taxed above $20,000 exclusion; 401(k)/IRA fully taxed
- Property tax: According to the Tax Foundation, New York has the sixth-highest effective property tax rate nationally. $15,000+ is common in Westchester and Long Island.
- Estate tax: $7.35M exemption with a cliff (estates exceeding 105% of the exemption are taxed on the entire amount), per New York Tax Law Article 26
Connecticut
- Top income tax rate: 6.99%
- Retirement income: Most retirement income taxed; Social Security partially taxed above thresholds
- Property tax: Among the highest nationally (~2.0% effective rate)
- Estate tax: $13.61M exemption (matches federal)
Minnesota
- Top income tax rate: 9.85%
- Retirement income: Fully taxed (Social Security partially taxed above thresholds)
- Estate tax: $3M exemption
Vermont
- Top income tax rate: 8.75%
- Retirement income: Fully taxed (Social Security partially taxed with low exemption thresholds)
- Estate tax: $5M exemption
Sources: Tax Foundation “Facts and Figures 2025”; state revenue departments; 24/7 Wall St. tax burden analysis
The full picture: A retired couple with $200,000 combined income (pension, Social Security, IRA distributions) could pay $0 in state income tax in Wyoming, or upward of $12,000 in California. That’s $1,000 per month in spending capacity, every month, for the rest of their lives. When you show a client this number over a 25-year retirement horizon, it becomes one of the most impactful planning conversations you can have.
Advisor takeaway: The highest-burden states hit retirees on multiple fronts: income tax, property tax, and estate tax. For clients in California, New York, Connecticut, Minnesota, or Vermont, model the cumulative lifetime cost of staying versus relocating. The OBBBA’s new $40,400 SALT cap reduces but does not eliminate the gap. Present the numbers over a 20-25 year horizon to make the magnitude tangible.
States With No Sales Tax (An Offset for Higher-Income-Tax States)
Five states levy no state sales tax:
- Alaska (no income tax either)
- Delaware (no sales tax, but income tax up to 6.6%)
- Montana (no sales tax, but income tax up to 6.75%)
- New Hampshire (no income or sales tax)
- Oregon (no sales tax, but income tax up to 9.9%)
For retirees with high consumption (travel, dining, vehicle purchases), the absence of sales tax can partially offset a higher income tax rate. According to the Bureau of Labor Statistics Consumer Expenditure Survey, retiree households spend an average of $52,141 per year, a significant portion of which falls under taxable consumption. Oregon’s 9.9% top income tax rate looks steep, but a retiree who spends $60,000 annually on taxable goods saves roughly $5,000+ per year compared to living in a state with 8-9% combined sales tax. Total burden, not any single tax, is what matters.
Estate and Inheritance Tax: The Other State Tax That Matters
According to the Tax Foundation’s Estate and Inheritance Tax data (2025), twelve states plus D.C. levy their own estate taxes, and six states levy inheritance taxes (Maryland has both). For clients with significant assets, the state estate tax can be a larger lifetime transfer than decades of income tax:
States with estate tax (2026): Connecticut, Hawaii, Illinois, Maine, Maryland, Massachusetts, Minnesota, New York, Oregon, Rhode Island, Vermont, Washington, D.C.
States with inheritance tax: Iowa (phasing out by 2025), Kentucky, Maryland, Nebraska, New Jersey, Pennsylvania
Key exemption levels:
- Massachusetts and Oregon: ~$1M-$2M (the lowest, catching far more estates than the federal exemption), per the Massachusetts Department of Revenue and Oregon Department of Revenue
- New York: $7.35M (with a cliff; exceeding 105% of the exemption taxes the full estate)
- Connecticut: matches federal ($15M for 2026)
- Federal: $15M per individual / $30M per couple (2026, under OBBBA), per IRS Revenue Procedure 2025-32
Sources: Tax Foundation “Estate and Inheritance Taxes by State” (2025); state revenue departments
For high-net-worth retirees, the state estate tax exemption can drive residency decisions more than the income tax rate. A $10M estate in Massachusetts faces state estate tax; the same estate in Florida faces none. That single planning decision can save $500,000+ in transfer taxes.
Comprehensive State-by-State Comparison Table
| State | Income Tax (Top Rate) | Social Security | Pensions | 401(k)/IRA | Tax Friendliness |
|---|---|---|---|---|---|
| Alabama | 5.0% | Exempt | Exempt | Partially exempt | Very friendly |
| Alaska | None | Exempt | Exempt | Exempt | Very friendly |
| Arizona | 2.5% | Exempt | Taxed | Taxed | Friendly |
| Arkansas | 3.9% | Exempt | Taxed | Taxed | Moderate |
| California | 13.3% | Exempt | Taxed | Taxed | Not friendly |
| Colorado | 4.4% | Partially taxed | Exclusion (caps removed 2026) | Exclusion | Friendly |
| Connecticut | 6.99% | Partially taxed | Taxed | Taxed | Not friendly |
| Delaware | 6.6% | Exempt | $12,500 exclusion (60+) | $12,500 exclusion (60+) | Moderate |
| Florida | None | Exempt | Exempt | Exempt | Very friendly |
| Georgia | 5.09% | Exempt | $65,000 exclusion (62+) | $65,000 exclusion (62+) | Very friendly |
| Hawaii | 11.0% | Exempt | Employer-funded exempt | Taxed | Moderate |
| Idaho | 5.695% | Exempt | Taxed | Taxed | Moderate |
| Illinois | 4.95% | Exempt | Exempt | Exempt | Very friendly |
| Indiana | 2.95% | Exempt | Taxed | Taxed | Moderate |
| Iowa | 3.9% | Exempt | Exempt | Exempt | Friendly |
| Kansas | 5.7% | Exempt | Taxed | Taxed | Moderate |
| Kentucky | 3.5% | Exempt | $31,110 exclusion | $31,110 exclusion | Friendly |
| Louisiana | 3.0% | Exempt | Federal pensions exempt | Taxed | Friendly |
| Maine | 7.15% | Exempt | $25,000 pension exemption | Taxed | Moderate |
| Maryland | 5.75% | Exempt | $39,500 exclusion (65+) | Taxed | Moderate |
| Massachusetts | 5.0% | Exempt | Taxed (gov’t exempt) | Taxed | Moderate |
| Michigan | 4.05% | Exempt | ~$65,987 exclusion | ~$65,987 exclusion | Friendly |
| Minnesota | 9.85% | Partially taxed | Taxed | Taxed | Not friendly |
| Mississippi | 4.0% | Exempt | Exempt | Exempt | Very friendly |
| Missouri | 4.8% | Exempt | Partially exempt | Partially exempt | Moderate |
| Montana | 6.75% | Partially taxed | Taxed | Taxed | Moderate |
| Nebraska | 5.84% | Exempt | Taxed | Taxed | Moderate |
| Nevada | None | Exempt | Exempt | Exempt | Very friendly |
| New Hampshire | None | Exempt | Exempt | Exempt | Very friendly |
| New Jersey | 10.75% | Exempt | $100,000 exclusion (62+) | $100,000 exclusion (62+) | Moderate |
| New Mexico | 5.9% | Partially taxed | Taxed | Taxed | Moderate |
| New York | 10.9% | Exempt | $20,000 exclusion (private) | Taxed | Moderate |
| North Carolina | 3.99% | Exempt | Taxed | Taxed | Moderate |
| North Dakota | 2.5% | Exempt | Taxed | Taxed | Friendly |
| Ohio | 2.75% | Exempt | Taxed | Taxed | Moderate |
| Oklahoma | 4.75% | Exempt | $10,000+ exclusion | Taxed | Friendly |
| Oregon | 9.9% | Exempt | Taxed | Taxed | Not friendly |
| Pennsylvania | 3.07% | Exempt | Exempt | Exempt | Friendly |
| Rhode Island | 5.99% | Partially taxed | Taxed | Taxed | Not friendly |
| South Carolina | 6.2% | Exempt | $10,000 deduction | $10,000 deduction | Friendly |
| South Dakota | None | Exempt | Exempt | Exempt | Very friendly |
| Tennessee | None | Exempt | Exempt | Exempt | Very friendly |
| Texas | None | Exempt | Exempt | Exempt | Very friendly |
| Utah | 4.55% | Credit offset | Taxed | Taxed | Moderate |
| Vermont | 8.75% | Partially taxed | Taxed | Taxed | Not friendly |
| Virginia | 5.75% | Exempt | Age deduction ($12,000, 65+) | Age deduction ($12,000, 65+) | Moderate |
| Washington | None | Exempt | Exempt | Exempt | Very friendly |
| West Virginia | 5.12% | Exempt (2026) | Taxed | Taxed | Moderate |
| Wisconsin | 7.65% | Exempt | Taxed | Taxed | Moderate |
| Wyoming | None | Exempt | Exempt | Exempt | Very friendly |
Sources: Tax Foundation “2025 State Tax Data”; Kiplinger “Retirement Taxes by State” (2026); SmartAsset; state revenue departments. Rates and exclusions current as of January 2026.
How to Use This in Client Conversations
State tax differences are most valuable when they’re modeled forward, not discussed in the abstract. According to U.S. Census Bureau migration data, Florida, Texas, and Arizona are the top three destination states for retiree migration, driven in large part by tax considerations. Telling a client “Florida has no income tax” is a fact. Showing them that relocating from New Jersey to Florida increases their sustainable spending by $6,800 per year for 25 years is a planning decision.
The variables that matter:
- Income composition. A client whose retirement income is 80% Social Security and 20% pension has a very different state tax picture than a client drawing primarily from IRAs. The exemptions and exclusions listed above are income-type-specific, not blanket.
- Marginal rate interactions. In graduated-rate states, a Roth conversion or large RMD can push a retiree into a higher state bracket, compounding the federal bracket impact. A $50,000 Roth conversion in California doesn’t just cost the federal tax; it adds up to $6,650 in state tax. This is why Tax Lab’s multi-layer modeling matters: it captures both federal and state bracket interactions in a single projection.
- Threshold effects. Several states have hard income cutoffs for Social Security exemptions (Connecticut at $75K/$100K, New Mexico at $100K/$150K, Rhode Island at $107K/$133.75K). A few thousand dollars of income above or below these thresholds can swing the state tax bill by hundreds or thousands of dollars.
- Total burden, not just income tax. Property taxes, sales taxes, and estate taxes all factor into the lifetime cost of living in a state. A “no income tax” state with high property taxes may cost a homeowner more than a “low income tax” state with low property taxes.
- Relocation timing. State residency is determined by domicile, and most states have specific day-count and intent-based tests. According to the American Institute of CPAs, states like New York and California are among the most aggressive in auditing departing high-income residents. A client who relocates mid-year may owe partial-year taxes to both states. Planning the move to align with the tax year boundary matters.
Modeling State Taxes in Retirement Plans
General-purpose financial plans often treat state taxes as a flat percentage or ignore them entirely. Research by David Blanchett at PGIM found that incorporating state tax optimization into withdrawal sequencing can improve after-tax outcomes by 5% to 15% over a 30-year retirement. That’s a problem, because the interactions between federal and state tax rules create planning opportunities that only show up in detailed modeling.
Income Lab’s Tax Lab includes full state income tax models for all 50 states, updated annually to reflect current rates, brackets, deductions, exemptions, and retirement income exclusions. This means you can:
- Compare states side by side. Show a client considering relocation exactly how their after-tax income changes by state, accounting for their specific income sources and amounts.
- Model Roth conversion impact at the state level. A conversion that’s optimal at the federal level may push a client above a state exemption threshold or into a higher state bracket. Tax Lab captures both layers.
- Project forward with bracket creep. State brackets inflate at different rates (some are indexed, some aren’t). A plan that looks tax-efficient today may not be in year 10 if the state doesn’t index its thresholds.
- Account for income-type-specific treatment. The same dollar from Social Security, a pension, or an IRA is taxed differently in most states. Tax Lab models each income source against the applicable state rules.
As of January 1, 2026, Income Lab updated all federal and state income tax models to reflect the most current tax rules, rates, and thresholds, including the OBBBA changes and 2026 state-level updates like Michigan’s completed phase-in and Colorado’s pension cap removal.
Key Takeaways
- Nine states have no income tax. But property taxes, sales taxes, and estate taxes mean “no income tax” is not “no taxes.” Evaluate total burden.
- Only eight states still tax Social Security. Down from thirteen in 2020. Most offer significant exemptions. Check the thresholds for your clients’ specific income levels.
- Thirteen states exempt all retirement distributions. The nine no-tax states plus Illinois, Iowa, Mississippi, and Pennsylvania. These are often overlooked in relocation conversations.
- Partial exclusions create planning opportunities. States like Michigan ($131,794 joint exclusion), Georgia ($130,000), and New Jersey ($100,000) offer large exclusions that can eliminate state tax on most retirees’ income.
- Flat-tax states simplify Roth conversion math. Fifteen states use flat rates, removing state bracket interactions from conversion optimization.
- State taxes are a controllable variable. Unlike market returns or federal law, clients can choose where to live. Model the difference. Show the numbers. Let the math drive the conversation.
Next Steps
See how state tax differences affect your clients’ plans. Income Lab’s Tax Lab models all 50 states’ retirement income rules. Schedule a live demo and we’ll walk through a state comparison using your client scenario.
Get the State Tax Quick Reference for Advisors. A one-page comparison of how all 50 states tax Social Security, pensions, and retirement account distributions, formatted for quick lookup during client meetings.
This guide reflects state tax rules effective January 1, 2026. State tax laws change frequently. Always verify current rules with the applicable state revenue department before making client recommendations.
Data sources: Tax Foundation (state income tax rates, estate and inheritance tax data); Kiplinger (state-by-state retirement tax guides); SmartAsset (tax friendliness ratings); AARP (retirement distribution taxation); individual state revenue department publications.
Sources:
- Tax Foundation State Tax Data: State income tax rates, brackets, estate and inheritance tax data (2026)
- Tax Foundation 2026 State Income Tax Rates and Brackets: Current-year rate tables for all 50 states
- Kiplinger Retirement Taxes by State: State-by-state retirement income tax treatment
- AARP State Tax Guide: Retirement distribution taxation by state
- Illinois Revenue 35 ILCS 5/203: Illinois retirement income exclusion statute
- California Franchise Tax Board: California income tax rates, retirement income treatment
- New York Department of Taxation and Finance: Pension exclusion rules, NYC surcharge details
- Michigan Department of Treasury: 2026 retirement income deduction phase-in completion
- Colorado SB25-136: Pension cap removal effective 2026
Continue Reading
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- TCJA Sunset and OBBBA: What Every Retirement Plan Needs Now
- Book a demo to compare state tax impact for your clients
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