Considering a Low Tax State for Retirement? Here’s How It Could Raise Your Costs

For retirement, you might assume that moving to a state with low or no income tax would allow your money to stretch further. However, this may not always be true.

“Moving to a state with little or no income tax can boost your take-home pay, but it doesn’t necessarily mean you’ll pay less in taxes overall. In many cases, the state simply shifts how it raises revenue,” said Max Elsasser, certified financial planner (CFP) and financial advisor at Beyond Your Hammock.

Retirees aren’t earning the same kinds of wages as they did during their working years. Their income usually comes from Social Security, pensions, or investments.

These sources of income are typically untaxed or subject to a lower tax in most states, which means that the savings from relocating to a low- or no-income tax state may be smaller than anticipated.

Plus, once you incorporate other taxes, insurance, and healthcare costs, the move to a low- or no-income tax state might end up being more expensive.

These are a few factors to pay attention to when considering a move.

Property Taxes May Be Higher Than Anticipated

Property taxes are an important consideration when comparing states.

“Take New Hampshire, where I grew up,” said Elsasser. “There’s no state income or sales tax, but property taxes are well above the national average. As home values have climbed, those taxes have pushed some long-term residents to sell because they can’t keep up with their property tax bill.”

Comparing Texas and California illustrates how those numbers can accumulate.

Texas might be appealing because there’s no state income tax. However, its effective property tax on owner-occupied housing is 1.36%, one of the highest in the country. For a home worth $300,000, that’s about $4,080 per year in property taxes.

Now, compare this with California. The state has an income tax, but its effective property tax is 0.70%, significantly lower than Texas’s. That means a homeowner with the same $300,000 house would pay $2,100 in property taxes for the year, about half of what they would pay in Texas.

So while residents of California hand over more money through income tax, their property tax bill may be thousands of dollars lower than what Texans pay each year. For retirees living on fixed incomes, those higher property taxes could hurt more than a modest income tax would.

Home Insurance Costs Have Soared In Some States

Property taxes are only part of the equation. Homeowners insurance is another cost where retirees might feel a bit of a financial strain.

In Florida, a state popular for retirement and with no income tax, the average homeowners’ insurance premium has ballooned to $9,462 per year, one of the highest in the country and much higher than the nation’s average of $3,303. Hurricanes, storm risk, and a stressed insurance market have caused costs to skyrocket.

Meanwhile, in California, despite the growing occurrence of wildfires, average premiums are $1,724, vastly lower than in Florida.

For retirees, these thousands of dollars a year can be the difference between enjoying retirement or needing to tighten the wallet in other areas.

Higher Sales Tax Rates Can Erode Your Savings

Another important factor to consider is sales tax. Many states with no income tax make up for it with sales tax. For example, Tennessee has no state income tax, but it has one of the highest combined state and local sales taxes in the country at 9.55%.

Now compare that with states that have an income tax but lower sales taxes, such as Virginia, with a 5.77% combined sales tax, and Maine, with a 5.5% state sales tax and no local taxes.

If you’re buying big-ticket items like appliances and electronics or regularly shop, these costs can quickly add up.

What to Do Before Moving

With all the variations in numbers, it can be hard to choose what is the most cost-effective destination to retire for your profile. Here are a few steps you can take to help you make the decision:

1. Choose three or four states you’d like to retire in. Include at least one with no income tax and one with a higher tax.
2. Look up county-level property taxes for neighborhoods you’d consider buying a home and living in, and apply them to your expected home value.
3. Get real insurance quotes, not just averages, for the type of home you’d live in. In states like Florida, this number may make or break your budget.
4. Take into account lifestyle expenses (cooling vs. heating, depending on the state), flights to see families, groceries, and services.
5. Build a 10- to 20-year projection so you can understand how your finances are impacted if insurance and property taxes go up.

“If someone is considering a move purely for tax savings, I recommend the ‘try before you buy’ approach. Take an extended trip or rent for a year before selling your current home,” said Elsasser. “That gives you a chance to experience daily life … before making a permanent move.”

The Bottom Line

Retirement planning goes beyond just trying to choose a state with no income tax; it’s about looking at the whole picture. Property taxes, home insurance premiums, and even sales tax can shift the number, sometimes making a low- or no-income tax state more expensive in the long run.

“Lower state taxes usually mean lower state revenue, so you have to ask what you might be giving up in exchange,” said Elsasser. “That could look like fewer public transportation options, higher homeowners insurance costs in places like Florida or Texas, or more limited healthcare access due to underfunded public programs.”

Before moving, collect as much data as possible—determine how property taxes or home insurance premiums in a particular state will affect you. This process can help you find a location that not only fits your budget but also supports the retirement lifestyle you’ve been working toward.