State Income Tax Considerations

The states with no income tax

No state income tax:

• Alaska
• Florida
• Nevada
• New Hampshire (ended its narrow investment-income tax in 2027; previously taxed only interest and dividends)
• South Dakota
• Tennessee (ended a narrow investment-income tax in 2021)
• Texas
• Washington (imposes a capital gains tax above $250k but no general income tax)
• Wyoming

These states typically make up revenue through higher property taxes, sales taxes, or specific use taxes.

The high-tax states

States with the highest top marginal rates (as of 2025, rates change periodically):

• California: 13.3% top (plus a 1.1% additional on over $1M)
• Hawaii: 11% top
• New York: 10.9% top (plus NYC adds another 3.876%)
• New Jersey: 10.75% top
• Oregon: 9.9% top
• Minnesota: 9.85% top
• Massachusetts: 9% (4% surcharge on income over $1M)
• District of Columbia: 10.75% top

These rates typically apply to high incomes; most residents in these states face lower effective rates, but the marginal rate on a dollar of additional wage or investment income can be severe.

Retirement income treatment varies

The most planning-relevant variation is how states treat retirement income:

Best treatment (most states):

• Social Security benefits exempt from state tax (38 states + DC).
• Pension income partially or fully exempt for many states.
• 401(k)/IRA withdrawals often taxed at regular rates.

Worst treatment:

• California: fully taxes all retirement income at regular rates (up to 13.3%).
• Minnesota: taxes most retirement income.
• Connecticut: taxes retirement income but provides some exemptions based on age and income.

Middle ground:

• New York: exempts first $20,000 of retirement income (pension/IRA/401(k)) at age 59½+.
• Illinois, Pennsylvania, Mississippi, Iowa (recently): do not tax most retirement income.

A high-income California retiree with a $150,000 annual withdrawal from retirement accounts pays roughly $15,000 more in state tax than the same retiree in Texas or Florida.

The retirement relocation question

Given these differences, should you move to a no-tax state for retirement?

The tax savings are real. At a $150,000 annual retirement income, moving from California (~9% effective state rate) to Nevada or Texas saves roughly $13,500/year. Over a 30-year retirement, that's $400,000+ not counting compounding of the savings.

But:

• Family and friends. Most retirees cite proximity to family as the top factor in location.
• Healthcare access. Some states have dramatically better healthcare networks than others.
• Climate and amenities. What you enjoy matters.
• Cost of living. Low-tax states sometimes have higher housing or other costs.
• Property tax. Texas and New Hampshire have high property taxes that partially offset the lack of income tax.

For retirees who are flexible and would be happy in multiple places, the tax savings can be substantial. For those with strong ties to their current state, the math may not overcome the non-financial factors.

Establishing residency

You can't just visit a no-tax state; you need to establish residency. This typically means:

• Spending more than half the year in the new state.
• Moving your driver's license, voter registration, primary bank, and mailing address.
• Establishing intent (buying or renting a permanent home; joining local clubs).
• Severing ties to the old state (selling the house or at least demonstrating it's not your primary residence).

States like California and New York are aggressive about challenging residency changes when large tax bills are at stake. Keep records.

Sales tax, property tax, excise tax

State income tax is only one dimension. Total state-and-local tax burden is what matters:

• Florida: no income tax, moderate property tax, 6% sales tax. Overall burden moderate.
• Texas: no income tax, high property tax, 6.25% sales tax. Burden moderate.
• Wyoming: no income tax, low property tax, 4% sales tax. Low overall burden.
• California: high income tax, moderate property tax (capped by Prop 13), 7.25% sales tax. High overall burden.
• New Jersey: high income tax, highest property tax, 6.625% sales tax. Very high overall burden.

For retirees who spend rather than earn, sales tax matters more than income tax.

How Horizons uses this

Horizons lets you specify a state tax rate as part of your overall tax expense. If you're modeling a relocation scenario, you can set a transition at the move date to lower the state rate starting that month, and see the impact on long-term net worth.