Tax Tips for Retirees in Midwest States

Tax season can always be a fraught, stressful time for American taxpayers, especially those who are limited or fixed incomes, such as retirees. Thankfully, many states offer a number of exemptions and tax shortcuts for retirees, though they aren’t always common knowledge.

As such, GOBankingRates has culled together a series of recommended tax tips for retirees from various experts — if you happen to live in the Midwest, are retired and are looking to pay less come tax time, keep reading.

Illinois is a state that does not tax retirement income, nor does it tax 401(k) withdrawals, pensions or Social Security benefits. As such, the financial planning firm Purposeful Wealth Advisors advises retirees to maximize their tax-free income sources; additionally, they suggest retirees minimize their property tax expenses (as Illinois has high property taxes), be prepared for the Illinois estate tax, convert traditional IRAs to Roth IRAs and to delay Social Security benefits for as long as possible to increase your monthly payment.

Per the finance website Asset Preservation, Indiana offers a number of deductions and credits to minimize a retiree’s tax liability, such as the Military Pay Deduction, Over 65 Circuit Breaker Credit (limiting how much your taxes increases yearly), State Tax Credit for the Elderly or Disabled and the Unified Tax Credit for the Elderly (offering $1,000 tax exemptions for taxpayers over 65).

In Iowa, Social Security benefits are exempted from the state’s income tax; further, any Iowan over 55 is exempted from having retirement income, 401(k)s, IRAs, pensions and annuities taxed. A Roth conversion can earn a retirement income exemption.

While Kansas is very tax friendly for retirees — all Social Security income and public pension income are exempt — retirement income such as IRAs and 401(k)s are fully taxable. Further, they offer a warning for retirees in Kansas: be advised that capital gains are treated as regular income and taxed accordingly in the Sunflower State.

Michigan retirees can take advantage of the state’s 2023 Lowering MI Costs Plan, in which Great Lake State retirees can select how they choose to deduct taxable retirement income — tiered subtraction systems, a phase-in subtraction system that allows for increasingly larger deductions each year or the Qualified Fire, Police and Corrections Retiree Subtraction for a full deduction by members of the fire, police or corrections departments.

Minnesota retirees can now take advantage of a “means-tested” income tax deduction for their Social Security benefits. Single taxpayers with adjusted gross incomes of less than $82,190, or married couples filing jointly making less than $105,380, do not have to pay state income tax on their Social Security benefits.

Retirees in Missouri are recommended to take advantage of some state-specific property tax relief — the Missouri property tax credit allows them to deduct $1,100 if they own or $750 if they rent, as long as they are at least 65 years old or disabled. 

In Nebraska, taxpayers over the age of 65 and with an income below $51,301 (for individuals) or $60,901 (for married couples) can take advantage of the Nebraska homestead exemption, which will lower their property taxes anywhere between 10% and 100% of their home value.

The North Dakota homestead credit can allow the Peace Garden State homeowning retirees over the age of 65 with annual incomes under $70,000 to receive 50% or 100% credit equal to their property taxes.

Ohio is another state with a variation on the homestead exemption. Retired Ohioans over 65 with Ohio Adjusted Gross Income under $38,600 can take advantage — it’s equal to the first $26,200 of the value of their single-family home.

South Dakota retirees who make less than $15,218 for a single household or $20,110 for a multi-person household can apply to have their municipal taxes reduced with the Property Tax Reduction from Municipal Taxes, with a reduction from 25% to 100%.

Retirees over 65 in Wisconsin who make less than $15,000 as individuals or $30,000 as joint-filing couples can deduct $5,000 of their retirement income from IRAs or qualified retirement plans.