RetireCountry

Lets start off by listing some of the "Best State and City" choices from a couple of popular publications. You may agree or disagree after looking at the tax information from each state.

According to CNN Money, here are the top 10 choices:
Middleton, WI
Hanover, NH
Louisville, CO
Lake Mary, FL
Claremont, CA
Papillion, NE
Milton, MA
Chaska, MN
Nether Providence, PA
Suwanee, GA

According to US News, here are the top 10 choices:
Bozeman, Montana
Concord, New Hampshire
Fayetteville, Arkansas
Hillsboro, Oregon
Lawrence, Kansas
Peachtree City, Georgia
Prescott, Arizona
San Francisco, California
Smyrna, Tennessee
Venice, Florida

Certified Retirement Communities

To qualify as a Certified Retirement City, each town must pass through a screening process. They usually evaluate each city on the criteria important to retirees - affordable cost of living, low taxes, low crime rate, quality medical care, recreation, educational and cultural opportunities, and most importantly - a warm, welcoming community.

The 6 states that have publicized their certification programs are:

Texas certified retirement community program
Louisiana certified retirement community program
Mississippi certified retirement community program
Kentucky certified community information
West Virginia Designated Retirement Community
Retire Tennessee program

State Sales Tax

All states except Alaska, Delaware, Montana, New Hampshire and Oregon, collect sales taxes. Some have a single rate throughout the state though most permit local city and county additions to the base tax rate. Those states with a single rate include Connecticut, Hawaii, Indiana, Kentucky, Maine, Maryland, Massachusetts, Michigan, Mississippi, New Jersey, Rhode Island, Vermont, Virginia, and West Virginia.

States with the highest sales tax (when you include weighted averages for county and city rates) are: Tennessee (9.4%), Louisiana (8.7%), Washington (8.5%), New York (8.25%), Arkansas (8.15%), Alabama (8.05%), Oklahoma (8.05%), and California (8.0%).

Personal Income Tax

A total of 41 states impose income taxes. New Hampshire and Tennessee apply it only to income from interest and dividends. Seven states (Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming) do not tax personal income. Of the 41 with a broad-based income tax, 35 base the taxes on federal returns, typically taking a portion of what you pay the IRS or using your federal adjusted gross income or taxable income as the starting point.

Retirement Income Taxes

Under federal law, taxpayers may be required to include a portion of their Social Security benefits in their taxable adjusted gross income (AGI). Most states begin the calculation of state personal income tax liability with federal AGI, or federal taxable income. In those states, the portion of Social Security benefits subject to personal income tax is subject to state personal income tax unless state law allows taxpayers to subtract the federally taxed portion of their benefits from their federal AGI in the computation of their state AGI.

Many states exclude Social Security retirement benefits from state income taxes. The District of Columbia and 26 states with income taxes provide a full exclusion for Social Security benefits -- Alabama, Arizona, Arkansas, California, Delaware, Georgia, Hawaii, Idaho, Illinois, Indiana, Kentucky, Louisiana, Maine, Maryland, Massachusetts, Michigan, Mississippi, New Jersey, New York, North Carolina, Ohio, Oklahoma, Oregon, Pennsylvania, South Carolina, and Virginia.

The remaining 15 states with broad-based income taxes tax Social Security to some extent:

Minnesota, Nebraska, North Dakota, Rhode Island, Vermont tax Social Security income to the extent it is taxed by the federal government. Connecticut, Iowa, Kansas, Missouri, Montana and Wisconsin tax Social Security income above an income floor. Iowa will gradually phase out its Social Security tax levy from 2008 through 2014. Missouri will phase out its Social Security tax levy by 2010. Colorado, New Mexico and Utah require that federally untaxed Social Security benefits be added back to federal AGI to calculate the base against which their broad age-determined income exclusions apply. States are prohibited from taxing benefits of U.S. military retirees if they exempt the pensions of state and local government retirees. Most states that impose an income tax exempt at least part of pension income from taxable income. Different types of pension income (private, military, federal civil service, and state or local government) are often treated differently for tax purposes.

States are generally free from federal control in deciding how to tax pensions, but some limits apply. State tax policy cannot discriminate against federal civil service pensions. Ten states exclude all federal, state and local pension income from taxation. These include Alabama, Hawaii, Illinois, Kansas, Louisiana, Massachusetts, Michigan, Mississippi, New York and Pennsylvania. Among these 10 states, only Kansas taxes any Social Security income, but only to the extent it is subject to federal taxation. These 10 states differ on the taxation of retirement income from private-sector sources. Kansas and Massachusetts do not exclude any private-sector retirement income, but most of the others allow a fairly broad exclusion. In tax year 2008 Kansas residents with an adjusted gross income of less than $75,000 may exclude Social Security income from state taxes. Pennsylvania allows a full exclusion. Alabama excludes income from defined benefit plans. Hawaii excludes income from contributory plans. Illinois and Mississippi exclude income from qualified retirement plans. Louisiana, Michigan and New York cap the private-sector exclusion at $6,000, $34,920 and $20,000, respectively.

Five states (California, Connecticut, Nebraska, Rhode Island, and Vermont) allow no exemptions or tax credits for pension and other retirement income that is counted in federal adjusted gross income. Most in-state government pensions are taxed the same as out-of-state government pensions. However, Arizona, Idaho, Kansas, Louisiana, New York, and Oklahoma provide greater tax relief plans than they do for out-of-state government pension plans. The District of Columbia also provides greater tax relief for DC government pensions than for state government pensions.

Three states (New Jersey, Massachusetts, and Pennsylvania) do not allow IRA contributions to be deducted from taxable income. Of the three, only Pennsylvania does not tax IRA earnings of taxpayers age 59 ½ years or older, since earnings are treated like pension income, which is tax exempt.