Jan 24, 2026
If you’re planning for retirement, you’re probably focused on a handful of key variables, including the size of your nest egg, withdrawal rate, asset allocations and taxes.
But one critical factor that’s often overlooked — and can have outsized consequences in retirement — is where you choose to live.
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Your location helps determine your cost of living, access to healthcare and overall quality of life. It also carries important tax implications that extend well beyond a state’s headline income tax rate. If you’re not factoring all of this in, you may be leaving significant money on the table.
With that in mind, here are the five most commonly overlooked state tax issues to consider before you retire.
1. Retirement income taxation
A state’s headline income tax rate typically applies to wages and earned income, but many states treat retirement income differently. If you rely on pensions, Social Security or retirement account withdrawals, your actual tax bill may be lower than expected.
States such as Illinois, Iowa, Mississippi, Nevada and New Hampshire do not tax pension income, according to Empower. (1) Illinois also excludes 401(k) and IRA withdrawals — including Roth conversions — from state taxable income. (2)
In short, a state doesn’t need to be completely “tax-free” for much or all of your retirement income to be shielded from state taxes.
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2. Social Security taxes
Social Security benefits are taxable at the federal level, but nine states also tax them at the local level.
According to Empower, the states that tax Social Security benefits include Colorado, Connecticut, Minnesota, Montana, New Mexico, Rhode Island, Utah, Vermont and West Virginia. (1)
If a significant portion of your retirement income comes from Social Security, it’s important to check whether your state imposes additional taxes on these benefits.
3. Property taxes (and costs)
States that don’t levy an income tax often make up for it with higher property taxes. Texas, for example, has no state income tax, but its effective property tax rate of 1.4% is higher than California’s 0.7%, according to the Tax Foundation. (3)
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For many retirees, property taxes are their largest tax expense. If you’re planning to move to a new state, overlooking this part of the tax code could be costly.
It’s worth mentioning that the property tax rate shouldn’t be considered isolation. Property prices are another important factor to consider.
Property tax rates shouldn’t be considered in isolation. Property values also matter: while California’s rate is lower than Texas, homes in California are generally much more expensive.
As of 2025, the median home in California is $788,920, compared to just $303,321 in Texas, per Experian. (4)
Ultimately, your property tax bill depends on both the local tax rate and value of your retirement home.
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4. State estate taxes
Although estate planning often follows retirement planning, the two are closely connected.
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Planning retirement without accounting for state estate tax rules could leave your loved ones facing a large bill after your death.
According to the Tax Foundation, 12 states and the District of Columbia impose estate taxes, including New York, Vermont, Maine, Oregon and Washington. (5)
Five states levy an inheritance tax, which is paid by beneficiaries rather than the deceased’s estate, including Nebraska, Kentucky, Pennsylvania and New Jersey.
Maryland is the only state that imposes both an estate and an inheritance tax.
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In short, ignoring estate or inheritance taxes when planning a retirement move could be costly.
5. Sales taxes
Perhaps the most easily overlooked tax is the sales tax. Nearly all states levy some form of sales tax, with the exception of Alaska, Delaware, Montana, New Hampshire and Oregon. (1)
In some states, sales taxes can significantly reduce your retirement spending without you noticing. California, for example, has a 7.25% rate, while Tennessee’s rate is 7%. (1)
If you plan to relocate in retirement, factor in the state’s sales tax rate and build a margin of safety — perhaps 5-10% — into your annual budget.
Article sources
We rely only on vetted sources and credible third-party reporting. For details, see our editorial ethics and guidelines.](https://moneywise.com/editorial-ethics-and-guidelines).*)
Empower (1; Illinois.gov (2); Tax Foundation (3); Experian (4); Tax Foundation (5).
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Vishesh Raisinghani is a financial journalist covering personal finance, investing and the global economy. He's also the founder of Sharpe Ascension Inc., a content marketing agency focused on investment firms. His work has appeared in Moneywise, Yahoo Finance!, Motley Fool, Seeking Alpha, Mergers & Acquisitions Magazine and Piggybank.
