If You Know These 5 State Tax Traps, You're A Savvy Retiree

When preparing to retire, some people think about moving to a state that has low taxes to make their money last longer. For example, moving to a state that has no individual income tax is a common choice for people preparing to quit the workforce. However, the cost of moving to a low-tax state can be surprising in certain situations. Some states with seemingly low costs have hidden tax traps that will end up eating away at your money.

Depending on how you plan to live in retirement, such as if you're still finding ways to make money by working part time, some of these state tax traps might hit you harder than expected. Not only should you study these hidden costs at the time you plan to retire, but you should also look ahead and consider how your tax situation might change as you hit certain age milestones. Some of the state tax traps you'll want to know about include taxes on property, sales, inheritance, fuel excise, and stock units that you're waiting to vest. You should never retire in states with odd tax situations that would cost you money in the long run, even if they don't tax income.

States that don't have an income tax might make up for the lost revenue by charging above-average property taxes. Texas and New Hampshire don't have income taxes, for example, but have some of the nation's highest effective property tax rates. Your property tax bill can come as a shock if you move to one of these states from a location with lower rates. 

For instance, let's say you live in Colorado before retirement. After you stop working, you decide to sell your $400,000 home there and buy a house of equal value in Texas, a no-income-tax state. The move may save you money on state income taxes, but your property tax rate will increase from 0.49% to 1.58%. While your Colorado property tax bill was $1,960, you'll now pay $6,320. 

Property taxes could also be an unwelcome surprise after a couple of years if seniors move to an area where property values are rising fast. Property tax bills are based on the estimated current value of the house, not what you paid for it. Even seniors who decide to rent properties in their new states could feel the effect of these high costs. Landlords typically include the cost of the property taxes they pay into the rent they charge. That said, some states offer property tax breaks for retirees, so you may want to investigate these options if you're planning to relocate.

Some states that don't charge income taxes might use a higher-than-average sales tax to make up the difference. For instance, Tennessee, Nevada, and Washington do not tax your income. However, those three states have some of the highest sales tax rates in the country.

If you're planning to buy a car after you move to Tennessee, you'll have to pay a full 7% sales tax on the vehicle, which could add a few thousand dollars to the purchase. Some local governments charge a sales tax in addition to the state rate. If you retire in one of these jurisdictions, you'll take an even bigger hit; in Nashville, Tennessee, for example, you'll pay 9.75% because of the 2.75% local sales tax. You might also want to research combined state and local rates before retiring and moving.

Some states levy taxes for goods, while others also add charges on services. Depending on how you plan to live in retirement, such charges might hit you particularly hard. In Washington, for example, seniors will pay sales tax on things they might use regularly, such as landscaping services, alarm monitoring, and property repairs. Washington doesn't charge a sales tax on groceries, but prepared food, alcohol, and soft drinks all have these charges applied.

The federal estate tax applies regardless of the state of residence; for those who die in 2026, it's levied on any estate valued over $15 million. However, if you want to leave money or property to your children, you should also know how inheritance or estate taxes are applied by the state where you plan to move after retiring.

On top of the federal estate tax, several states have their own inheritance and estate taxes; your estate or heirs may have to pay these. Alternatively, your estate might pay at the state level but not at the federal level if the state threshold is lower than the federal one. It's worth noting that estate taxes at the state level are charged in the state where the decedent lived at the time of death. Inheritance taxes are charged against the heirs in the state where they lived at the time of the decedent's death.

For example, Washington does not charge state income tax, but it has an estate tax rate of between 10% and 35% for estates worth at least $3 million. If you move to Washington after retiring with the idea of avoiding state income taxes, you may end up reducing the value of what your heirs receive, potentially costing more money for the family in the long run.

Although some older people choose to drive less, a larger number want to continue driving after retiring to maintain their sense of independence. If you're hoping to move to a low-income-tax state to save money in retirement, but you plan to continue driving a lot to see friends and family or for vacations, you may want to research fuel excise taxes in the new state. States that have this type of fuel tax charge it when you fill up your vehicle with gasoline or diesel fuel, based on the number of gallons you're purchasing.

Among the states with no income tax, Washington and Florida are in the top quartile of states in terms of fuel excise taxes. Florida charges 39.4 cents per gallon, while Washington charges 59 cents. This means you'll pay over $1 extra for every two gallons of fuel you use in Washington. For comparison, Alaska (which also has no state income tax) charges only 9 cents per gallon. If you plan to use your vehicle a lot in retirement, these fuel charges can add up quickly. And if your retirement plans involve traveling in a larger RV (which only manage 6 to 10 miles per gallon of fuel), you'll be facing significant extra costs. 

If you worked for a company that gave you restricted stock units (RSUs), and moved before they vested and you retired, you may owe taxes to the state where you originally lived. So, if you plan to relocate to a new state after retiring, research how this move will affect the tax on this form of employee compensation.

When your RSUs vest, you are expected to pay income tax on their fair market value. Should you ever sell the stocks, you'll potentially pay capital gains taxes if the value is higher than it was when you received the stocks.

The complexity (and surprise for retirees) may come in how the income tax is charged. Most states charge you based on the dates you were working to earn the RSUs. If you lived in one state while working to earn the RSUs and moved to a new state after retiring, you'll almost certainly have to pay the state income taxes where you were working when you earned them. In other words, moving to a no-income-tax state might not save you from paying state taxes on the value of the RSUs. Each state has its own rules regarding RSUs, so check with a tax professional about your options to try to reduce your costs.