Move here! The most untaxing states for retirees

If you plan to relocate to another state when you retire, climate, culture and cost of living no doubt top your list of selection criteria. Taxes have even greater implications for most seniors, however.

Each state has its own set of rules for taxing ordinary income, retirement income, real estate, inherited property and estates.

"There is a tendency for retirees to think about moving to a state that doesn't have a personal income tax, and that's a good place to start," said Kathleen Thies, state tax analyst for tax services firm CCH, in Riverwoods, Ill. "But when you sit down and do the math, it's not always the best answer for every taxpayer. Those states need to make money somewhere, so they've usually got higher sales or property taxes."

That's why only three (Alaska, Nevada and Wyoming) of the seven non-income-tax states are on our list of top tax-friendly states for retirees. Florida, South Dakota, Texas and Washington did not make the cut.

There is no definitive ranking for the most tax-friendly states for retired people. Much depends on how your income is derived.

When you're no longer collecting wages, your personal income tax rate "might not be as big of a factor as it was when you were a wage-earner," Thies said. In the Golden Years, taxes on real estate and pension plans may be more significant.

As such, our top 10 tax-friendly states for seniors are listed in alphabetical order, rather than attempting to rank them based on tax policy.

Nonetheless, the states on our list are clear front-runners in initiating tax policy that helps to attract and retain baby boomers. They were culled from data collected from CCH, the Tax Foundation, state revenue departments, retirementliving.com and the Federation of Tax Administrators. (Property tax rates, compiled by the Tax Foundation using Census Bureau data, are through 2011 and reflect the mean property tax as a percentage of mean home value.)

Plus, the least tax-friendly states for retirees.

By Shelly Gigante, Special to CNBC.com
Posted 23 Aug. 2013

State income tax: 2 percent to 5 percent
State sales tax: 4 percent
Mean property tax rate as a percentage of mean home value: 0.40 percent, but seniors 65 and older do not pay state property tax
Property tax ranking: No. 49 (with one being the highest and 50 the lowest.)
Estate tax: None—but taxpayers pay a "pickup" tax for state death taxes
Inheritance tax: None

The Yellowhammer State boasts not only a balmy Gulf Coast breeze but one of the most favorable retirement tax climates. Senior homeowners pay nothing, nada, zilch in property taxes, and retirement income from Social Security and most pensions is also exempt.

Add low income tax rates and a sales tax exemption on prescription drugs, and you might be left with enough in your wallet to enjoy more seafood gumbo with sweet iced tea.

State income tax: None
State sales tax: None, but many municipalities impose a local sales tax of 2 percent to 5 percent.
Mean property tax rate as a percentage of mean home value: 1.01 percent
Property tax ranking: No. 22 (with one being the highest and 50 the lowest)
Estate tax: Limited to federal estate tax collection
Inheritance tax: None

For the intrepid senior who's not repelled by subzero temps, the state aptly known as the Last Frontier offers breathtaking scenery, more than half of the world's glaciers and front-row seats to the famed northern lights. But the zero tax policy on retirement benefits and lack of state income tax might be its biggest attractions for boomers seeking a new address.

Property taxes, which are assessed at full market value, can sting, but homeowners 65 and older are exempt from municipal taxes on the first $150,000 of assessed value of their home.

Oh, and did we mention the government gives you money to live there? The state issues an annual dividend check to each resident based on its oil revenues, which has ranged recently from $875 to more than $2,000.

State income tax: 2.2 percent to 6.75 percent
State sales tax: None
Mean property tax rate as a percentage of mean home value: 0.52 percent
Property tax ranking: No. 46 (with one being the highest and 50 the lowest)
Estate tax: Expired in 2013
Inheritance tax: None

With its coastal shoreline of picturesque beaches (cue the dolphins) and proximity to both Philadelphia and Washington, the first state to ratify the Constitution has become a haven for the senior set seeking to stretch their dollars. Indeed, despite being diminutive, Delaware offers some pretty big tax breaks.

There is no sales tax, no inheritance or estate tax, Social Security benefits are exempt and up to $12,500 of retirement income is exempt for those 60 and older, including income derived from pensions, dividends, interest, capital gains and rental income. Not sold, yet? Homeowners 65 and older can get a credit equal to half of the school property taxes, up to $500.

State income tax: 1 percent to 6 percent
State sales tax: 4 percent
Mean property tax rate as a percentage of mean home value: 0.97 percent
Property tax ranking: No. 25 (with one being the highest and 50 the lowest)
Estate tax: None
Inheritance tax: None

The largest state east of the Mississippi, known for peaches and the Masters Golf Tournament, spares none of its southern charm on retired residents. In 2012, the exemption on most retirement income jumped to $65,000 per spouse for those 65 and older.

Social Security benefits are not taxed at all. Neither are estates or inherited property. Toss in the comfortable climate, access to culture (Atlanta, Savannah), and low state sales tax and Georgia easily maintains its position as a perennial hot spot for aging adults.

State income tax: 2 percent to 6 percent
State sales tax: 4 percent
Mean property tax rate as a percentage of mean home value: 0.48 percent
Property tax ranking: No. 48 (with one being the highest and 50 the lowest)
Estate tax: None
Inheritance tax: None

With its world-famous Mardi Gras, Cajun cooking and river boat casinos, the Pelican State has no trouble keeping tourists entertained. But Louisiana makes a special effort to make people feel at home. Make that double the effort if you happen to be retired.

Since the destruction of Hurricane Katrina, the state has stepped up its marketing efforts to attract more residents, promoting not only its attractions but its tax breaks for seniors. Besides having the second-lowest property tax rate in the nation, the state exempts from taxation all Social Security benefits and income from military, federal, state and local government pensions.

State income tax: 3 percent to 5 percent
State sales tax: 7 percent
Mean property tax rate as a percentage of mean home value: 0.63 percent
Property tax ranking: No. 40 (with one being the highest and 50 the lowest)
Estate tax: Imposed on the value of the decedent's estate when the total gross estate exceeds the available exemption amount of $1 million, which follows the federal exemption
Inheritance tax: None

As the only state besides Pennsylvania that exempts all forms of retirement income from taxes, including Social Security, pensions, 401(k)s and IRAs, Mississippi cannot be ignored at a retirement haven.

The Magnolia State, which spawned B.B. King, Oprah Winfrey, Elvis Presley and authors William Faulkner and John Grisham, also exempts prescriptions drugs, motor fuel and health-care services. Payments made by Medicare and Medicaid are also exempt.

State income tax: 6 percent on dividends and interest income only
State sales tax: 7 percent, but municipalities can add their own tax up to 2.75 percent. Prescription drugs are exempt.
Mean property tax rate as a percentage of mean home value: 0.74 percent
Property tax ranking: No. 37 (with one being the highest and 50 the lowest)
Estate tax: None
Inheritance tax: 5.5 percent to 9.5 percent on all real and personal property inherited above the $1.25 million exemption in 2013 and $2 million in 2014.

Seniors who reside in the birthplace of blues get a heaping helping of tax breaks with their pulled pork sandwiches. And it's only getting better. Salaries, Social Security and retirement income from IRAs and pensions are not taxed. And while stock dividends and interest are taxed at 6 percent, residents 65 and older with total annual income of up to $26,200 are exempt.

Though in a national ranking, Tennessee's sales tax is undeniably high, prescription drugs, which consume a major portion of most retirees' budgets, are exempt. And while the state's inheritance tax remains in effect, it is slated to be eliminated by 2016.

State income tax: None. Income, Social Security benefits and retirement income are not taxed
State sales tax: 6.5 percent
Mean property tax rate as a percentage of mean home value: 0.90 percent
Property tax ranking: No. 28 (with one being the highest and 50 the lowest)
Estate tax: None
Inheritance Tax: None

This southwestern state has long been a draw for tourists and, if you believe the conspiracy theorists, extraterrestrials. (Area 51 lies in the desert off Rt. 375). With Lake Tahoe, Las Vegas and the majestic Sierra Nevada mountains within its borders, it's easy to see why.

But the Silver State is also an oasis for retirees. There is no state income tax, and income generated from retirement accounts and Social Security benefits is exempt. The sales tax rate is admittedly steep, but food and prescription drugs get a refreshingly budget-friendly pass.

State income tax: 3 percent to 7 percent (adjusted for inflation annually)
State sales tax: 6 percent
Mean property tax rate as a percentage of mean home value: 0.54 percent
Property tax ranking: 45 (with one being the highest and 50 the lowest)
Estate tax: None
Inheritance tax: None

The birthplace of music legends James Brown and Chubby Checker, not to mention game show host Vanna White, rolls out the red carpet for retirees. This sunny southern belle levies no tax on Social Security and issues homeowners who are 55-plus a property tax break, allowing a local tax exemption on the first $50,000 of a property's fair market value.

Those 65 and older can also deduct up to $15,000 per spouse in qualifying retirement income, offset by other retirement deductions claimed. Absent any state inheritance or estate tax, you might be able to upgrade your pad to a historic townhouse in Charleston or a beachfront bungalow near Myrtle Beach.

State income tax: None
State sales tax: 4 percent; prescription drugs and groceries are exempt
Mean property tax rate as a percentage of mean home value: 0.58 percent
Property tax ranking: No. 44 (with one being the highest and 50 the lowest)
Estate tax: None
Inheritance tax: None

If Yellowstone National Park or the snow-capped peaks of the Grand Tetonsare your idea of a great backyard, the Cowboy State could be an ideal spot to spend your retirement. That taxes are senior-friendly is an added bonus. Wyoming has no state income tax, no estate or inheritance tax, and sales taxes are minimal. Retirement income, including Social Security benefits, is also tax-free.

Old West enthusiasts can enjoy covered wagon rides and trips to Native American museums while they count the money they save on property taxes, which are among the lowest in the nation. Residential real estate is taxed on less than 10 percent of a property's assessed value.