Eight states have no state income taxes. Those eight countries (Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington and Wyoming) do not tax salaries, dividends, interest, or any type of income. The eight states with no income taxes are Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington and Wyoming. There are also big differences in the way states evaluate sales and use taxes and in the way that localities evaluate sales and property taxes, especially on residential real estate.
A good way to minimize your retirement income tax bill is to move to one of eight or nine states, depending on how you categorize income states that have no income taxes. So, it doesn't matter how much money you earn or where in the United States you live; if your state is one of these states, your retirement income will be tax-free. Among the states that tax pension income, several exclude a certain amount of pension income from taxes. Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington and Wyoming do not have a state income tax.
If all your interest and dividends accrue in retirement accounts (think of an IRA or a 401 (k) plan), you may not yet have to pay New Hampshire state income tax on your retirement income. Finally, while Alabama and Hawaii don't tax pension income, they do tax retirement income from 401 (k) and IRAs. States vary widely in how they tax retirement income, so location is an important consideration in financial planning for retirement. All states and the District of Columbia impose these taxes, except Alaska, Delaware, Montana, New Hampshire and Oregon.
Another state, New Hampshire, has no state income taxes on salaries, retirement account withdrawals, or pension payments. If you're about to retire or are already retired, it's essential that you understand your state's tax laws. On the other hand, the lowest state sales taxes are found in Colorado (2.9%), Alabama, Georgia, Hawaii, Louisiana, New York, South Dakota and Wyoming (3.0% in each). Some of the exemptions are generous enough that many retirees in those states don't pay any income tax.
Illinois has a fixed tax rate of 4.95% and, in most cases, does not tax pension distributions, 401 (k) plans, or IRAs. For the most up-to-date information, visit the website of your state's tax department or work with a tax professional.