Once you reach retirement, some expenses will drop off while others will appear. One thing that won’t change, however, is your responsibility as a taxpayer — but that doesn’t mean that you can’t find ways to save. During retirement, every penny counts, so reducing your tax liability can help you retain more of your nest egg, especially if you live in a state that’s known for its high tax rates.
Click through to learn about ways that you can still lower your tax bill in the 15 least tax-friendly states.
Tax Tips for Retirees Living in States With Higher Tax Rates
Depending on your age, living arrangements and exemptions you’re eligible to claim, you could benefit from tax savings. Here’s a look at the states that are the least tax-friendly and how to keep from paying too much in each one of them.
1. Nebraska: File for a Homestead Exemption
Nebraska has some of the highest property taxes in the country. You might qualify for the Nebraska homestead exemption, however, if you’re 65 or older. Depending on your income, you could exempt up to the entire assessed value of your home from property tax. You must file Form 458 and Schedule I with the state after Feb. 1 and no later than June 30 each year to claim the exemption.
2. Minnesota: Claim Charitable Contributions
When your income is similar to that of the median income for households age 65 to 74 in the United States of just over $49,000, your marginal tax rate in Minnesota is 7.05 percent, leaving you to find ways to reduce your tax liability. Typically, if you don’t itemize on your federal tax return, you’re not able to get credit for charitable contributions on your state return. But Minnesota allows you to file Schedule M1M and deduct 50 percent of your total charitable contributions over $500 even though you didn’t itemize on your federal return.
3. Connecticut: Claim a Property Tax Credit
Connecticut offers a state tax credit of up to $300 per year for property taxes assessed and paid during the year for your car, residence or both. Plus, if you’re 65 or older, you might qualify for a property tax credit or rent rebate if you meet residence and income requirements.
4. Kansas: Own Your Home
Kansas homeowners who have an income that falls below $34,450 per year are entitled to claim the homestead refund as long as they meet one of these other requirements:
– Born before Jan. 1, 1962
– Endured a total and permanent disability or blindness during the entire year, regardless of age
– Had a dependent child who lived in household who was born before Jan. 1, 2017 and under age 18 the entire year
The refund is based on the amount of property taxes paid during the year and can be as much as $700.
5. Missouri: Consider Filing Separately
Missouri exempts all of your Social Security benefits from state income tax, but only if you are 62 or older and your adjusted gross income falls below the annual limits of $100,000 for joint filers and $85,000 for all other filing statuses, including married filing separately. For eligible taxpayers exceeding those limits, a partial exemption might be available. In case you and your spouse each have AGIs below $85,000 but would be over $100,000 if you file jointly, calculate your taxes both ways — filing jointly and separately — and compare to make sure you’re not overpaying.
Learn what each tax filing status means, and how your status impacts your tax bill.
6. Vermont: Use IRA Required Minimum Distributions for Charitable Giving
Vermont follows the same rules for taxing Social Security as the federal government, which means the portion that counts as taxable income depends on your income. For example, if you make a qualified distribution directly from your IRA to a charity — up to $100,000 per year — that money is never included in your adjusted gross income. But if you took a distribution and then wrote a check to a charity, that money might get deducted if you itemize, but it will still be included in your AGI.
7. Rhode Island: Keep Money in Your 401k
In addition to not taxing your Social Security benefits if your income falls below the limits for your filing status, Rhode Island also exempts the first $15,000 of certain retirement income from state income tax. Retirement income includes distributions from 401k, 403b and 457b plans, plus military retirement pay, government pensions, private pensions and annuities — but not IRA distributions. Other reasons exist to rollover your 401k into an IRA, however, that might outweigh the Rhode Island tax break.
8. New Mexico: Live Past 100 or Meet Income Restrictions if You’re Over 65
Since 2002, New Mexico hasn’t imposed any income tax on residents age 100 or older as long as they aren’t claimed as a dependent on someone else’s tax return. And if you’re 65 or older and meet the income restrictions, you can exclude up to $8,000 of retirement income from New Mexico state income tax.
9. West Virginia: Claim a Deduction for Being Over 65
Taxpayers who live in West Virginia and are age 65 or older can automatically deduct $8,000 from their taxable income when filing a state income tax return — no matter where the income comes from. And when filing a joint return, the deduction applies to each taxpayer, so you and your spouse could deduct a total of $16,000.
10. Utah: Maximize Your Retirement Tax Credit
Utah residents age 65 or older can claim a tax credit of up to $450 — or $900 if filing a joint return — to offset any state income tax liability. To qualify, your income — which includes nontaxable interest income — must fall below the state limits for your filing status. And if you don’t have enough tax liability in any given year, you can’t carry forward the excess credit to a future year.
11. Colorado: Stay in the Same House
Colorado offers seniors age 65 and older a senior property tax exemption that excludes 50 percent of the first $200,000 of the actual value of your primary residence. To qualify, you must have owned and used the home as your primary residence for the past 10 years. Moving from house to house over time won’t qualify you until you’ve reached the 10-year threshold.
There are lots of good reasons to downsize your home — if you live in Colorado, just make sure you do it before you turn 55 to save the most money.
12. Illinois: Claim the Senior Citizens Assessment Freeze Homestead Exemption
Illinois has a very high property tax rate at 1.97 percent. But, if you are over 65, have a total household income of $65,000 or less and meet certain other criteria, you can freeze the assessment at the value for the year that you start to qualify for the exemption. To take advantage of this tax break, file PTAX-340, Senior Citizens Assessment Freeze Homestead Exemption application and affidavit, each year with the Chief County Assessment Office to keep your property taxes lower.
13. Iowa: Claim the Iowa Property Tax Credit
Iowa doesn’t tax Social Security benefits but does have a property tax rate approaching 1.5 percent. To offset this, people over 65 or who are totally disabled and have income below the annual limits can claim a tax credit up to the amount of their property taxes for the current tax year. To be eligible, file your claim with the county treasurer by June 1 of the preceding year.
14. New York: Purchase a Qualifying Defibrillator
New York offers a special tax credit for anyone who purchases one or more automated external defibrillators. Your credit is equal to the cost you pay for each unit — up to $500 each — which comes in handy with New York income taxes at 6.45 percent and sales taxes at 8.49 percent. You can also claim a tax credit for a qualifying long-term care insurance policy; the credit is equal to 20 percent of the premiums you pay.
15. North Dakota: Claim Homestead or Renter’s Tax Credits
In North Dakota, you can save money on your income taxes whether you own your home or rent.
When you own your home, you can reduce the taxable value of your home and pay less in property taxes if you:
– Are 65 or older or permanently disabled
– Have income below $42,000
– Have assets, including your home, worth less than $500,000
When you rent a home and 20 percent of your rent exceeds 4 percent of your income, you can receive a tax credit for the difference up to $400.
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