Tax-friendly places to retire

Steer clear: Three states are particularly tough on retirees. Not only do they fully tax most pensions and other retirement income, they also have high top tax brackets: California (9.55% on income less than $1 million), Rhode Island (9.9%) and Vermont (9.5%).

Connecticut and Nebraska also fully tax retirement income, with top rates of 5% and 6.84%, respectively.

Social Security benefits

Depending on your income, you may be required to include up to 85% of your Social Security benefits in your taxable income when filing your federal return. But in recent years, many states have been moving away from taxing Social Security benefits.

In addition to the nine states that lack a broad-based individual income tax, 27 states and the District of Columbia do not tax Social Security.

No Social Security tax: Alabama, Arizona, Arkansas, California, Delaware, Georgia, Hawaii, Idaho, Illinois, Indiana, Kentucky, Louisiana, Maine, Maryland, Massachusetts, Michigan, Mississippi, New Jersey, New York, North Carolina, Ohio, Oklahoma, Oregon, Pennsylvania, South Carolina, Virginia and Wisconsin.

Some Social Security tax: Colorado, Connecticut, Iowa, Kansas, Minnesota, Missouri, Montana, Nebraska, New Mexico, North Dakota, Rhode Island, Utah, Vermont and West Virginia.

But Missouri will phase out its Social Security tax by 2012, and Iowa will gradually phase out its Social Security tax by 2014. Kansas residents can now exclude Social Security income from their taxes if their adjusted gross income is less than $75,000, regardless of whether they are single or married.

Seniors living in Colorado, New Mexico and Utah must add back the portion of Social Security benefits not taxed by the federal government to calculate their eligibility for certain state tax breaks.

Sales taxes

Don't forget to include state and local sales taxes in your personal budget analysis. Some states exempt food and medicine; others tax every dime you spend.

No state sales tax: Alaska, Delaware, Montana, New Hampshire and Oregon (although Oregon is considering adding one).

High state sales tax: California's newly increased sales tax of 8.25% is the highest statewide sales tax in the nation. Five other states -- Indiana, Mississippi, New Jersey, Rhode Island and Tennessee -- each have a state sales tax of 7%.

But the retail-tax pain doesn't always stop at the state level. Most states allow cities and counties to assess their own sales tax (including Alaska, which has no state sales tax). For example, Chicago imposes a 10.25% combined sales tax, the highest of any major U.S. city. Combined rates can reach 10% in cities in Alabama, Arizona and California.

In 2008, more than 500 U.S. cities either increased their sales-tax rate or initiated a new sales tax, according to the annual sales-tax-rate study by tax-services company Vertex, in Berwyn, Pa. "We're already hearing discussions about changes in state taxes to come this year, and we expect the average state sales-tax rate to continue to trend modestly upward for a fourth consecutive year," says Vertex's John Minassian.

No local sales tax: Only Connecticut, Kentucky and Maine do not allow municipalities to impose their own sales tax on top of state levies.

• Map: Compare sales, 'sin' and gas taxes around the US

Property taxes

Property taxes are a major cost factor, particularly for retirees living on fixed incomes. But many local jurisdictions offer property-tax breaks to full-time residents, some based on age alone and others linked to income. Tax rates vary significantly from state to state and among cities in the same state.

For example, a retired couple with an annual income of $90,000 and a home worth $525,000 would pay about $11,800 in total state taxes if they lived in the upscale community of Boca Raton on the east coast of Florida. But if they lived in the ritzy enclave of Naples on the state's Gulf Coast, they'd pay about $4,000 less, according to "America's Best Low-Tax Retirement Towns."

Lowest median real-estate taxes (from lowest to highest), based on data from a 2007 Census Bureau survey and Tax Foundation calculations: Louisiana, Alabama, West Virginia, Mississippi and Arkansas.

Highest median real-estate taxes (from highest to lowest): New Jersey, New Hampshire, Connecticut, New York and Rhode Island.

"America's Best Low-Tax Retirement Towns" is a good starting point if you're trying to determine the financial implications of moving or staying put. It rates the total tax burden for more than 200 cities, broken down by different income levels and home values.

This article was reported by Mary Beth Franklin for Kiplinger's Personal Finance Magazine.

Published Sept. 23, 2009

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