These States Don’t Tax Retirement Income—but Beware of the Hidden Housing Costs

After a lifetime of building your nest egg and dutifully paying your dues, getting hit with a state income tax on your retirement distributions can feel like a slap in the face for retirees.

And in a majority of the U.S., 401(k), IRA, and pension payments—even Social Security in some states—are taxed as regular income.

That’s why many retirees may consider fleeing to one of the 13 states that don’t tax retirement income. But even then, the search for a tax-free paradise can lead some seniors to some of the most expensive housing markets.

In these states, hidden housing costs like high property taxes and home insurance premiums can be enough to wipe out any tax savings entirely.

Where tax savings collide with high housing costs

For most retirees, housing is the single largest line item in the budget—and in states with no income tax, that line item is getting significantly more expensive.

“Property taxes and insurance premiums represent the two most significant 'hidden' costs in tax-friendly states,” explains Jiayi Xu, senior economist at Realtor.com®.

Part of the issue is simple arithmetic: Without income tax revenue, state and local governments have to find other ways to fill their coffers. Often, they turn to property taxes.

“Texas and New Hampshire, for instance, not only maintain some of the nation's highest property tax but they are also the states seeing the fastest-growing tax burdens between 2023 and 2024,” says Xu.

The median annual property tax bill in New Hampshire was a whopping $7,102 in 2025, according to data from Realtor.com, and in more than half of the retirement tax free states, the annual property tax bill exceeded the national median.

But property taxes can vary significantly based on the local rate and assessed value of a home—potentially pushing that bill much higher than the median.

A separate analysis of property tax data from Realtor.com found that almost 19% of New Hampshire homeowners had annual property tax bills over $10,000 in 2025. In Austin, TX, 36% of homeowners paid over that threshold.

Beyond taxes, insurance poses another major cost of homeownership—particularly in the Sun Belt.

“Similarly, Florida’s insurance landscape poses a major financial hurdle; metros like Miami and Cape Coral, which are popular retirement destinations, hold the highest premium-to-market value ratios among the top 100 U.S. markets,” says Xu.

A Realtor.com analysis of U.S. Census Bureau data found that Florida homeowners paid a median of $2,000 to $2,500 a year just for their home insurance premium. That’s to say nothing of the estimated 15% of Florida homes that lack coverage all together because the cost is too prohibitive.

“Furthermore, retirees must account for supplemental flood insurance,” Xu warns, something that she describes as “a substantial expense that is almost universally excluded from standard homeowners policies.”

Federal tax considerations

Regardless of where you move, you can’t outrun the IRS. The federal government still taxes most retirement income—including 401(k)s, traditional IRAs, and pensions—as ordinary income.

However, the federal bite has recently gotten a lot smaller for the average retiree. In response to a growing chorus of seniors struggling with inflation, the One Big, Beautiful Bill Act introduced a significant new Senior Deduction.

This deduction allows eligible seniors to shield a much larger portion of their income than the standard deduction alone. And according to Xu, the impact can be huge.

“For a single senior, the deduction reaches $23,750, while married couples can shield up to $47,500—an increase of $6,000 and $12,000, respectively,” she says.

That creates what Xu describes as a “massive tax-free floor” for retirees. Given that the median retiree household income sits between $47,000 and $68,000, this floor covers the lion’s share of earnings for most Americans.

When you layer a massive federal deduction on top of a state that charges zero income tax on distributions, the potential savings are even bigger.

Be careful about playing both sides at once

As tempting as may be to chase these tax havens, George Dimov, CPA and founder of Dimov Tax, warns that the most expensive part of chasing residency is the risk of being audited by the state you left. 

This doesn’t apply to retirees who truly move, but to those who try to have it both ways, claiming residency in a tax-free state like Florida while keeping their real life back in their high-tax state.

According to Dimov, the danger lies in the "domicile" test—something that’s far more complex than just counting days on a calendar, as most people often assume.

“I have had clients who lost their residency audits even though they owned a home in Florida, had a Florida driver's license, but spent more than 183 days in New York,” he says. 

“The auditors look at all sorts of things like cellphone tower data, E-ZPass records, where your credit card was used and where you logged in to Netflix. One of my clients lost his case because his dog still went to the vet in Manhattan.”

It’s a chilling prospect, and Dimov says that to satisfy an auditor, you have to prove you’ve actually abandoned your old life. 

He says auditors will look at the location of your primary doctor, where you keep your family photos and safe deposit boxes, and even which state’s local services you rely on most. If your heart, your hobbies, and your pets are still in your old neighborhood, the state you left will likely ensure your tax bill stays there, too.

Moving for tax savings is only a winning strategy if you’re prepared to truly move on, and if the other costs of retirement—like housing and healthcare, and other essentials like food and transportation—pan out. Otherwise, the savings of a tax-free state can quickly be eclipsed by the high costs you were trying to outrun.