It's True: These 13 States Don't Tax Retirement Income

Where you live seems to matter more -- and less -- today than ever before. It matters less due to technology's ability to connect the world and give us the ability to communicate like never before. Video messaging allows us to speak to friends and family who live thousands of miles away as if we are standing right next to them. It's also fairly common for people to work remotely for companies based in another state or even another country.

However, where you live can still impact other parts of your life because of factors including the weather, cost of living, traffic, and your taxes. Some states don't tax any income, offering potentially a nice windfall to one's earnings and savings. The same applies to retirement income. While the majority of states do tax retirement income, 13 do not, although naturally, things aren't so black and white. Let's dive in.

Nine states don't have taxes

These 9 states don't levy a tax at all. This could have to do with politics in the state or the desire to boost the population, which usually leads to a faster-growing economy. This strategy has been successful with people in overcrowded states with high taxes moving to other states with no taxes. Here are the 9 that don't tax any income:

• Alaska
• Florida
• New Hampshire (see below)
• Nevada
• South Dakota
• Tennessee
• Texas
• Washington
• Wyoming

It probably won't surprise you to learn that Florida, Texas, and Nevada are three of the top-five, fastest-growing states in the country between 2008 and 2023. There are likely other reasons to explain why this has occurred, but taxes are certainly an important one.

One thing to note is that New Hampshire does tax income from investments, such as dividends, at a 5% rate, although you must make at least $2,400 if you are single and $4,800 if filing jointly. However, this tax has been eliminated and will be phased out after this year.

Four states tax -- but not retirement income

The four states below levy a tax on payroll income but spare retirement income:

• Illinois
• Iowa
• Mississippi
• Pennsylvania

Per the Internal Revenue Service (IRS), retirement income can include Social Security benefits and income from annuities, retirement or profit-sharing plans, insurance contracts, and individual retirement accounts (IRAs). Forty-one states don't tax Social Security benefits, and others could join this group in the future.

Keep in mind that you are still on the hook for federal taxes on income from sources such as Social Security. Retirees who make between $25,000 and $34,000 as a single filer still need to pay taxes on as much as half of their benefits. Retirees who make over $34,000 would have to pay taxes on as much as 85% of their benefits. These figures are not the actual tax rate but just the amount of income that taxes will be levied on. The same rules apply to joint filers, but the ranges are $32,000 and $44,000 for getting half of your benefits taxed and more than $44,000 for 85% of benefits taxed.

Ultimately, even though some states tax retirement income and others don't, the situation is rarely so cut and dry. For instance, Minnesota has one of the highest tax rates on Social Security benefits but is a cheaper place to live than the national average. Washington doesn't tax any income but still has a total tax burden of over 8% due to high sales and excise taxes. Other states may charge expensive property taxes.

So while important, taxes on retirement income should not be your only consideration when thinking about which state to live in.

The $22,924 Social Security bonus most retirees completely overlook

If you're like most Americans, you're a few years (or more) behind on your retirement savings. But a handful of little-known "Social Security secrets" could help ensure a boost in your retirement income. For example: one easy trick could pay you as much as $22,924 more... each year! Once you learn how to maximize your Social Security benefits, we think you could retire confidently with the peace of mind we're all after. Simply click here to discover how to learn more about these strategies.

View the "Social Security secrets" »

The Motley Fool has a disclosure policy.