State taxes in retirement: the exemptions that change the map

Last reviewed July 2026 · 5 min read

Two retirees with identical portfolios can pay wildly different state taxes — and the headline income-tax rate is a poor predictor of which one pays more. What actually moves the needle is how a state treats retirement income specifically: Social Security, pension and IRA distributions, and capital gains each get their own rules, and the exemptions redraw the map.

The nine states with no income tax

Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming levy no personal income tax (New Hampshire completed the repeal of its interest-and-dividends tax in 2025). Two footnotes: Washington imposes a 7% excise on very large long-term capital gains, and no-income-tax states often make it back through sales and property taxes — the total tax picture is what matters.

Full exclusions: income tax states that skip retirees

More surprising are the states with a real income tax that simply exempt retirement income. Pennsylvania taxes wages at a flat 3.07%, but distributions from 401(k)s, IRAs, and pensions taken after retirement age (59½) are entirely exempt — a working couple pays; the same couple retired pays nothing on the same dollars (early withdrawals, though, are taxed). Illinois goes further: its flat 4.95% tax excludes all federally qualified retirement income — IRA, 401(k), and pension distributions — with no age requirement and no dollar cap. For a retiree living on $150,000 of IRA withdrawals, Illinois is effectively a no-tax state; for a high-earning worker it is not.

Partial exclusions: age-gated allowances

A larger group shields a fixed slice per person. Georgia is the standout: at 65+, each spouse excludes up to $65,000 of retirement income — defined broadly to include pensions, IRA distributions, interest, dividends, and capital gains ($35,000 each at ages 62–64). A couple aged 65+ can shelter $130,000 a year against Georgia’s flat tax (5.19% for 2025, scheduled to drop to 4.99% for 2026). Others in this family: Colorado ($24,000 per person of pension/annuity income at 65+ against its 4.4% flat tax), Kentucky ($31,110 per person at any age), Michigan (up to $67,610 per person for 2026), and New York ($20,000 of pension and annuity income from 59½). Watch for means tests: New Jersey’s generous exclusion vanishes entirely once income passes $150,000 — a one-dollar cliff — and Connecticut’s phases out over $100,000 of joint AGI.

Social Security: exempt almost everywhere

Federally, up to 85% of Social Security can be taxable. States are far kinder: the overwhelming majority exempt benefits completely, and for 2026 only eight states tax them in any form — Colorado (under age 65), Connecticut, Minnesota, Montana, New Mexico, Rhode Island, Utah, and Vermont. West Virginia’s phase-out finishes in 2026, taking it off the list. Even within the eight, income thresholds mean many middle-income retirees pay nothing — but a large Roth conversion or IRA withdrawal can push you past those thresholds and pull benefits into state tax.

Reading the map for your own plan

The pattern to notice: states tax types of income, not people. A retiree funded by a taxable brokerage account gains little from Pennsylvania or Illinois (their exclusions cover retirement-plan distributions, not capital gains), while an IRA-heavy retiree gains a lot. Georgia’s exclusion covers investment income too, which favors mixed portfolios. And local layers matter — Maryland’s counties add 2.25–3.3% on top of the state rate, and Indiana’s counties pile onto its flat 3%. A move that looks tax-neutral on headline rates can swing thousands of dollars once the exemptions are applied to your income mix.

Try it in Deorbit Plan

Pick your state in the Household panel — the simulator applies that state’s rate or bracket table, its Social Security treatment, and its per-person retirement-income exclusion (with age gates) to every simulated year, alongside federal tax. The state share appears in the stacked bars of the Taxes & MAGI chart and in the Year table. To compare relocation scenarios, save a scenario per state and put them side by side in Compare — same portfolio, different map.

Educational content only — not financial, tax, or investment advice.

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