Should I Move to a No-Income-Tax State When I Retire? What the Math Actually Shows
A lower tax rate on paper doesn't always mean a lower tax bill in practice.
Renee Fischer had done her homework. After 28 years in the Bay Area, she and her husband sold their home and moved to a suburb outside Austin. Texas had no income tax. California's rates were among the highest in the country. The math seemed obvious.
Eighteen months later, she called Kevin Lum's office with a different question. "We moved to save money," she said. "Why does it feel like we're paying more?"
Kevin sees this pattern often enough that it shaped an episode of his channel. In his video, "Moving to Save Taxes in Retirement Could Actually Cost You More — Here's Why," he explains why "best states for retirement taxes" lists answer the wrong question: a no-income-tax state still funds itself somehow, and for retirees that bill often shows up elsewhere. We’re sharing the framework Kevin uses with clients weighing a relocation, along with a case that shows how the math can flip.
The Four Factors That Actually Determine a Retirement Tax Bill
1. How Does the State Tax Retirement Income?
"No income tax" hides a more specific question: how does the state treat Social Security, pensions, and 401(k) or IRA withdrawals?
Most states no longer tax Social Security. As of 2026, only eight still do — Colorado, Connecticut, Minnesota, Montana, New Mexico, Rhode Island, Utah, and Vermont — and several offer deductions that shield many retirees. Pension and withdrawal rules vary independently, so a state that spares Social Security may still tax a 401(k) distribution.
Ask yourself: Have I confirmed how this state treats my specific income sources — Social Security, pension, and retirement account withdrawals — rather than assuming "no income tax" covers all three?
2. How Does the State Tax Property?
States without an income tax generally recover that revenue through property tax. Two homes of equal value can carry very different bills depending on how long the owner has held the property and what exemptions apply.
Some states cap annual assessment increases for long-term owners, so a decades-old homeowner may pay tax on a fraction of current value while a new buyer next door pays near full market value. That distinction rarely shows up in an average-rate comparison, but it can be the largest variable in a relocation.
Ask yourself: Am I comparing the property tax I would actually pay as a new buyer, not the statewide average that includes long-term homeowners with capped assessments?
3. How Does the State Tax Spending?
Sales tax arrives across everyday purchases rather than one annual bill. A high combined rate adds up for an active retiree, and some states tax groceries outright, hitting even modest budgets.
States that lean hardest on sales tax to replace income tax revenue tend to reward savers and penalize spenders, which is worth naming honestly rather than discovering a year into a move.
Ask yourself: Given my actual spending habits, would a higher sales tax state cost me more over a year than a lower-tax state with a state income tax would?
4. How Does the State Tax the Estate Left Behind?
This one is easy to skip since it affects heirs, not the retiree directly. Most states have no estate or inheritance tax, but more than a dozen still do, often at thresholds far lower than the federal exemption. Some are as low as $2 million, a number a paid-off house and a retirement account can cross easily.
Rules can also depend on who is inheriting — a spouse or child may be exempt where a sibling or unrelated heir is not.
Ask yourself: Do I know what my estate would owe in this state, and does that threshold apply to people in my actual life, not just a hypothetical heir?
The Case That Changes the Math: California vs. Texas
The comparison behind Renee's call, outlining a real client scenario:
A California couple owned a home worth $900,000 today, bought decades earlier for $200,000. Under Proposition 13, property tax is based on assessed value, capped at 2% growth annually, putting their assessed value near $350,000 and property tax near $4,000 a year. Living on untaxed Social Security and untaxed groceries, their total tax bill was roughly $4,000 a year.
They sold and bought a $600,000 home in Texas with no income tax, which on paper is a clear win. But Texas resets property tax to the purchase price at closing, with no cap for a new buyer. Late-2025 senior exemptions ($140,000 plus $60,000 for over-65 owners) only reduce the school-district portion of the bill; county, city, and special-district taxes still apply to full value. The result: a new property tax bill near $9,000 a year, more than double what they paid in California.
Add potential capital gains from selling a highly appreciated home, and the "no income tax" move didn't produce the savings a ranking list promised.
The lesson isn't that Texas is a poor choice. Plenty of retirees are well served there. It's that a state's headline tax status and a household's actual bill are two different calculations, and only one matters.
Watch the Full Breakdown
Kevin walks through all four factors, including the full Texas-versus-California breakdown, in his video, "Moving to Save Taxes in Retirement Could Actually Cost You More — Here's Why," part of his tax planning playlist covering related decisions like Social Security timing and Roth conversions.
Ready to Model the Real Numbers?
A "best states" list can't account for a specific home, income mix, or estate. Kevin's firm models the real numbers behind a relocation decision.
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FAQs: Retiring to a No-Income-Tax State
Is it always cheaper to retire in a state with no income tax?
Not necessarily. No-income-tax states typically fund government through property tax, sales tax, or both. A retiree with a modest fixed income and a paid-off home might save; one buying at full market value or spending heavily on taxable goods could end up paying more overall.
Which states don't tax Social Security benefits?
As of 2026, only eight states tax Social Security in some form: Colorado, Connecticut, Minnesota, Montana, New Mexico, Rhode Island, Utah, and Vermont, and many offer deductions that reduce or eliminate the tax for most retirees.
Why did the property tax comparison between California and Texas turn out the way it did?
Proposition 13 caps annual assessment increases for existing California homeowners, so a home held for decades can be taxed on a fraction of its current value. Texas resets taxable value to the purchase price at closing, and recent senior exemptions only apply to the school-tax portion of the bill. A long-term California owner and a new Texas buyer can end up with very different bills on similarly priced homes.
Do I need to worry about estate taxes if I'm not wealthy?
It depends on the state. Federal exemptions are high, but some state thresholds are far lower. A few kick in around $2 million, which a paid-off home plus a retirement account can approach. Check the threshold and how it treats spouses and children versus other heirs.
What else should I consider besides taxes before relocating in retirement?
Taxes are one input. Insurance costs, especially homeowners insurance in weather-prone states, can offset tax savings entirely. Healthcare access, proximity to family, climate, and cost of living all matter too. A state that wins on paper for taxes isn't automatically the right move.
Kevin Lum, CFP® | Retirement Made Simple
This article is companion content to the Retirement Made Simple YouTube channel. It is for informational purposes only and does not constitute personalized financial advice.