These states tax retired workers the least
You’re not alone if you’re retired- or semi-retired- but still earning income from work. Many older Americans earn a paycheck from part-time jobs, freelance gigs, rental properties, or business ventures, even after leaving their full-time careers.
And if that describes your situation, one question worth asking is: Which states are the most tax-friendly for retirees still working?
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Typically, retirees draw income from various sources: Social Security benefits, pensions (for some), and investment income such as capital gains, dividends, and interest.
But many also rely on earned income—wages reported on a W-2, contract or freelance income via 1099s, income from pass-through entities like LLCs or partnerships (reported on a Schedule K-1), or net rental income.
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As part of an ongoing series examining the best states for retirement based on income source and net worth, we previously looked at the best states for retirees who rely primarily on Social Security.
In upcoming installments, we’ll explore where to retire if your income comes mainly from investments or retirement account withdrawals.
In this installment, we’re focusing on retirees whose primary income source is still earned income.
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How the IRA taxes income in retirement
Before diving into the state rankings, it’s worth doing a quick review of how different types of income are taxed at the state level.
Most state income tax systems are built around taxing earned income—wages, salaries, tips, and self-employment earnings. These types of income are taxed at the state’s ordinary rates and brackets.
By contrast, many states offer partial or full exemptions for income like Social Security benefits or public pensions.
Here’s how several common types of retirement-related income are taxed:
- K-1 income: If you have an ownership stake in a partnership, S corporation, or are a beneficiary of certain trusts, you’ll receive a Schedule K-1. The income reported retains its character (business income, dividends, capital gains, etc.) and is typically taxed according to the state’s standard income tax rules.
- Rental income: Net rental income — after deductions such as mortgage interest, property taxes, repairs, and depreciation — is generally treated as ordinary income and taxed at the state’s regular income tax rates.
- 1099 income: Freelancers, gig workers, and independent contractors report income via various 1099 forms (such as 1099-NEC, 1099-MISC, or 1099-K). No matter the form, this income is generally taxed as ordinary income.
Related: The 9 worst states for Social Security income taxes
Bottom line: State income tax rates really matter for retirees who still generate a significant share of their income from work, business interests, or rental properties. Unlike Social Security or certain retirement distributions, earned income rarely receives special treatment.
The best states for income taxes in retirement
From a pure income tax perspective, the most favorable states for retirees who still earn a paycheck are those without a state income tax.
“These states are especially attractive for individuals with high earned income looking to minimize their state income tax liability,” says Robert Westley, a regional wealth advisor with Northern Trust. For high earners, the potential savings can add up quickly.
Currently, nine states do not tax earned income: Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming.
But Westley cautions that “no income tax” doesn’t mean “no tax.”
“For instance, Washington does not tax earned income but does tax the capital gains of high earners,” he says. “Many of the other states make up revenues with higher property taxes, sales taxes, and other levies — including state estate taxes.”
Other states are also working toward lower tax burdens.
According to Tim Bjur, a senior content management analyst at Wolters Kluwer, Kentucky, Mississippi, and Kansas are among a group of states implementing or considering revenue-based triggers designed to phase down income tax rates.
“Kentucky and Mississippi are not yet members of the group of states with no personal income tax,” Bjur says. “But they are racing to enact revenue-based triggers that intend to reduce rates to zero.”
In Kentucky, a new law allows for future income tax rate reductions based on revenue performance, though it does not require the state to meet 100% of its revenue targets to proceed. The legislation became law without Governor Andy Beshear’s signature — he did not veto it.
In contrast, Governor Laura Kelly vetoed a tax reform bill in Kansas, but the state legislature voted to override her veto. That law does not eliminate the income tax. Instead, it uses revenue triggers to transition Kansas from a two-bracket graduated system to a flat 4% income tax rate over time.
Related: Secretary Bessent hints Social Security income tax changes are coming
These developments could reshape the tax landscape for retirees in the years ahead — particularly those whose retirement includes continued earned income from work, rentals, or business activity.
What about flat tax states?
For retirees still working, states with flat income tax rates can also be appealing.
“A low, flat rate provides more certainty for seniors who are unsure if the income will fluctuate each year — for example, a gig job,” said Bjur. “Generous personal income tax exemptions and standard deductions also play a role.”
As of 2025, fifteen states impose a flat tax on all taxable income, regardless of income level:
- Arizona (2.5%)
- Colorado (4.4%)
- Georgia (5.39%)
- Idaho (5.695%)
- Illinois (4.95%)
- Indiana (3.0%)
- Iowa (3.8%)
- Kentucky (4.0%)
- Louisiana (3.0%)
- Michigan (4.25%)
- Mississippi (4.4%)
- North Carolina (4.25%)
- Pennsylvania (3.07%)
- Utah (4.55%)
Both Iowa and Louisiana transitioned to flat taxes beginning in 2025.
However, it’s important to note that while flat tax systems might seem advantageous at first glance, progressive tax structures often benefit lower-income earners, such as retirees working part-time or those with modest self-employment income.
“In a progressive system, lower income levels are taxed at lower rates, which can result in a smaller tax burden for retirees who aren’t earning substantial amounts,” said said Jean-Luc Bourdon, a wealth adviser with Lucent Wealth Planning,
Tax credits and other considerations
Some states offer targeted tax credits for older residents, often based on property taxes paid.
“Most of the credits target low-income seniors and are not very generous,” said Bjur. “California has a fairly generous senior head of household credit that is not tied to property taxes, with a $95,779 adjusted gross income cap for the 2024 tax year.”
And while income tax rates get most of the attention, don’t overlook other important factors such as standard deductions, personal exemptions, and how states treat specific income sources like retirement account distributions or capital gains.
For more about tax friendly states, read Which state should you retire to
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