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It’s a great thing to see so much content centered around tax savings. Knowing how taxes work and the nuance surrounding it can minimize tax, and retirees have access to many tax benefits that others may not.However, I do tend to notice a forgotten about tax that can trip retirees up if the knowledge and awareness is lacking. It’s also going to be different for many people reading this. That is none other than state tax in retirement.
Why is it Less Focused On?
State tax varies significantly, so many people focus on the universal tax US residents face, which is at the federal level. But most retirees I know recognize that tax paid, whether to the state or the IRS, is money out of their pocket.
The problem is that a general article about retirement taxes can’t give you a complete picture. Someone retiring in Pennsylvania is playing a very different game than someone retiring in California. And if you’re thinking about relocating in retirement, the difference between the right and wrong state could be worth tens of thousands of dollars over a 20 to 30 year retirement.
So let’s walk through five states as examples, so we can see the nuance in state tax: Pennsylvania, Florida, Texas, Georgia, and California.
Florida: The Retirement Magnet
There’s a reason so many retirees head south. Florida has no state income tax. That means your Social Security, pension, 401(k) distributions, and IRA withdrawals are all completely free from state-level taxation.
Capital gains are also zero at the state level.
The catch people don’t always account for is property insurance. Florida homeowners are paying an average of over $7,000 per year in homeowner’s insurance premiums. That’s a real number that needs to be built into any retirement income plan.
Property taxes run around 0.91%, which is modest, and the homestead exemption caps assessment increases at 3% per year, so your tax bill won’t spiral on you as home values rise.
But overall, Florida is a very tax-friendly state for retirees.
Texas: Low Taxes, High Property Bills
Texas also has no state income tax, which makes it attractive on the surface. Retirement income of every kind, including investment gains from a taxable brokerage account, is untouched at the state level.
But there is a trade-off. Because Texas doesn’t collect income tax, it leans heavily on property taxes to fund government services.
The average effective rate is around 1.68%, which is among the highest in the country. On a $400,000 home, that’s roughly $6,700 per year before any exemptions.
Seniors can qualify for homestead exemptions and deferral programs, so it’s worth understanding what’s available in the specific county you’re considering.
Sales tax also runs about 8.2% on average, though groceries and prescription medications are generally exempt.
Pennsylvania: Retiree-Friendly
Pennsylvania surprises a lot of people. The state has a flat 3.07% income tax, which sounds like bad news. But there’s a key detail you don’t want to miss: Pennsylvania exempts 100% of Social Security, pension income, 401(k) withdrawals, and IRA distributions for residents age 60 and older.
For most retirees, that covers the bulk of their income.
What the 3.07% does apply to is earned income from part-time work, interest, dividends, and capital gains from a taxable brokerage account. So if you’re retired and selling appreciated stock positions regularly, you will owe the flat 3.07% on those gains.
Take a couple, both over 60, pulling $80,000 per year from their IRAs and $20,000 in Social Security. Their Pennsylvania state tax bill? Likely zero on all of it.
Now add $30,000 in capital gains from their brokerage account. That generates about $921 in state tax. Most retirees we work with would consider that manageable.
One area where Pennsylvania stands alone is the inheritance tax. Pennsylvania charges a mandatory inheritance tax starting at dollar one. Children and grandchildren pay 4.5%, siblings pay 12%, and most others pay 15%. Spouses are exempt. This is something that needs to be part of any estate plan for Pennsylvania residents, and it’s a topic I’ve covered in detail separately.
Georgia: Generous Exclusions for Seniors
Georgia has a state income tax, but it builds in meaningful relief for retirees.
If you’re between ages 62 and 64, Georgia excludes $35,000 per person of retirement income from state tax. If you’re 65 or older, that exclusion increases to $65,000 per person. For a married couple both over 65, that’s $130,000 of retirement income that won’t be touched by the state.
What makes Georgia particularly interesting is that capital gains count toward that retirement income exclusion. So investment gains from a taxable account aren’t stacked on top of your other income for tax purposes. They’re folded in.
A couple in their late 60s pulling $60,000 from their IRAs and $20,000 in long-term capital gains has $80,000 of retirement income. With a $130,000 combined exclusion, their Georgia state tax bill is zero.
Only gains and income above those limits get taxed, and Georgia’s rates are far more moderate than California’s.
California: The Expensive Exception
California is in a category of its own.
The state has a progressive income tax with rates ranging from 1% all the way to 13.3%. Social Security is the one exception, which is not taxed at the state level.
Everything else, including pensions, IRA withdrawals, 401(k) distributions, and capital gains, is taxed as ordinary income. California does not offer the preferential long-term capital gains rates that the federal government provides. A $100,000 long-term capital gain that might be taxed at 15% federally could be taxed at 9% or more at the state level depending on your total income.
For a retiree with a sizable taxable brokerage account, that adds up quickly.
Property taxes are capped through Proposition 13 for longtime homeowners, but that benefit disappears when a property changes hands. New buyers face market-value assessments.
California can absolutely work as a retirement state for the right person. But the tax picture needs to be part of that conversation.
How Capital Gains Fit Into the Picture
This is the piece that catches people off guard. When most retirees think about state taxes, they’re thinking about their IRA distributions or pension. But taxable brokerage accounts, investment property sales, and other capital events also generate income that the state may want a piece of.
Here’s a quick summary of how each state handles it:
Florida and Texas tax capital gains at 0% because there is no state income tax.
Pennsylvania applies the flat 3.07% rate to all capital gains.
Georgia includes capital gains in the retirement income exclusion, so the first $65,000 per person (age 65+) is tax-free.
California taxes all capital gains as ordinary income at rates up to 13.3%.
If you’re planning a large asset sale in retirement, a Roth conversion strategy, or a significant brokerage liquidation, understanding your state’s treatment of that income is just as important as the federal side.
Actionable Steps
1. Map your income sources before you map your state. If the bulk of your retirement income comes from Social Security and an IRA, Pennsylvania and Georgia may offer more protection than their reputations suggest. If you carry a large taxable brokerage account, the no-income-tax states become much more compelling.
2. Account for the full cost of living, not just the tax rate. A 0% income tax in Texas doesn’t help much if property taxes are consuming $8,000 per year and that’s $3,000 more than you’d pay elsewhere. Run the full picture.
3. If you’re a Pennsylvania resident, plan around the inheritance tax. It applies at every dollar and it hits children at 4.5%. Trusts, beneficiary designations, and gifting strategies can all play a role in reducing that exposure.
4. If you’re considering relocating, run the numbers over a 20-year horizon. State tax decisions compound over time. A $5,000 per year difference is $100,000 over 20 years, before any investment growth on those savings.
5. Talk to a financial planner who understands multi-state tax rules. Especially if you split time between states, own rental property in a different state, or are considering a move. The rules are layered and the stakes are real.
State taxes won’t make the front page of every retirement planning conversation. But for the retirees who take the time to understand them, the savings are very real.