Understanding Why Some States Have Higher Income Taxes

You might wonder why income taxes vary so much from state to state.
The answer usually lies in how states balance their budgets. Some states, like California and New York, fund extensive public services with higher income taxes. Others, like Texas or Florida, skip income taxes but collect more from sales, property, or tourism taxes.

If you live or plan to retire in a high-tax state, your take-home income shrinks faster.
This makes smart tax planning essential — not optional.

How High State Income Taxes Affect Your Retirement

The more you pay in state taxes, the less you keep for yourself.
In retirement, every dollar matters.
Higher taxes can:

• Drain your savings faster
• Force you to withdraw more from IRAs and 401(k)s
• Push you into higher tax brackets at the federal level
• Reduce the effectiveness of compounding growth

If you’re relying on steady distributions from retirement accounts, ignoring state taxes could cause a serious shortfall.

Learn more about handling Required Minimum Distributions (RMDs) here.
Also see our physician-specific RMD strategies.

Should You Move to a Low- or No-Income-Tax State?

Many retirees ask: Should I move?

States like Florida, Nevada, Tennessee, and Texas have no income tax.
Moving could immediately boost your after-tax retirement income.

Questions to ask yourself:

• Would the cost of living offset the tax savings?
• Are you willing to leave behind family and community?
• Would estate taxes or property taxes still create issues?

In some cases, a smart partial relocation strategy can work:
Spend 183+ days per year in a no-tax state to claim residency without fully severing ties.

Here’s the IRS’s full list of state tax agencies for further research.

Key Tax Planning Strategies to Lower Your State Tax Burden

You don’t always have to move to benefit.
Here are strategies you can apply today:

Maximize Retirement Account Contributions

Maxing out pre-tax retirement plans like 401(k)s and 403(b)s reduces taxable income now.
Later, you can manage distributions to control your taxable footprint.

Check out how 1099 Contractors can manage their income for maximum tax savings.

Use Roth Conversions Strategically

Converting to a Roth IRA, especially during low-income years, can mean tax-free income later — often outside the reach of high state taxes.

Here’s the IRS page on Roth conversions and how they work.

Consider Asset Location Planning

Where you hold assets matters:

• Put tax-inefficient investments inside Traditional IRAs
• Reserve tax-free growth assets like municipal bonds for taxable accounts

Every small optimization adds up over 20+ years of retirement.

Explore smart ways to protect your assets from costly mistakes here.

Offset Income with Deductions

Physicians and high earners often miss valuable deductions:
Home office, professional development, even business travel.

Learn how business vacations can legally boost deductions.

How Relocating Before Retirement Can Boost Your Wealth

Making a move five years before you stop working could amplify your wealth.
Here’s why:

• Residency rules often require proof over multiple tax years
• Selling a primary home before leaving a high-tax state could qualify you for generous capital gains exemptions
• You avoid “exit taxes” some states try to impose

Example:
A California doctor relocating to Nevada could save more than $40,000 annually in taxes alone.

Retirement Withdrawals: Are They Taxed Differently by States?

Yes — and it’s complicated.

Some states tax all retirement distributions.
Some exclude certain types like Social Security benefits.
Others give generous exemptions for pensions but not for IRA withdrawals.

You need a custom plan based on:

• Your account types (Traditional, Roth, SEP IRA, 403(b), etc.)
• Your future state of residence
• Your anticipated withdrawal schedule

What Are the Most Tax-Friendly States for Retirees?

Generally, retirees favor states like:

• Florida (no state income tax, no inheritance tax)
• Nevada (no state income tax)
• Wyoming (low property taxes too)
• Tennessee (no income tax on wages or retirement distributions)

Other states like Pennsylvania, Illinois, and Mississippi offer retirement-specific tax breaks despite having some form of income tax.

See how you can save money without sacrificing your enjoyment.

How to Reduce Taxable Income Without Moving

If you want to stay put, you still have options:

• Invest in Roth IRAs and Roth 401(k)s
• Maximize Health Savings Accounts (HSAs)
• Leverage tax-loss harvesting to offset gains
  (Learn how to use market losses to find tax-saving opportunities.)
• Create side income streams shielded with legal deductions
  (Discover how physicians boost income outside medicine.)

The goal: reduce reportable income and control your taxable profile.

Roth IRAs and Roth Conversions: The Smart Play for State Taxes

Roth accounts grow tax-free.
Withdrawals are tax-free.
And states generally cannot touch Roth withdrawals if done correctly.

Tactical Roth conversions:

• While living in a low-tax state temporarily
• During gap years (post-retirement but before Social Security starts)
• After significant market downturns (lower asset values = lower tax cost)

Review IRS rules on Roth IRAs here.

This move could shield hundreds of thousands in future retirement income from both federal and state taxes.

Can Private Insurance or Trusts Help Shield Wealth?

In some cases, yes.

• Private placement life insurance (PPLI) structures allow tax-deferred growth
• Irrevocable trusts can protect assets from both creditors and some taxes
• Dynasty trusts can preserve wealth for multiple generations while minimizing estate taxes

These advanced moves require careful legal and tax advice.
When done correctly, they create another layer of protection from aggressive state tax regimes.

See more strategies to reduce costs like home insurance without losing coverage.

FAQ: High State Income Taxes & Retirement Planning

1. Do all states tax retirement income?

No. Some states fully exempt retirement income, while others tax certain types like IRA or 401(k) withdrawals. Always check your state’s specific rules.

2. Can Roth IRA withdrawals be taxed by the state?

In most cases, no. If your Roth distributions are qualified, they are not taxed by either the federal government or your state.

3. Is moving to a no-income-tax state always worth it?

Not always. You may save on income tax but pay more in property, sales, or healthcare costs. Do the math before deciding.

4. Can I reduce my state tax burden without moving?

Yes. You can use Roth accounts, HSAs, deductions, and legal tax shelters. The right strategy depends on your income and location.

5. Do residency rules affect how much tax I pay?

Yes. Most states have strict residency requirements (often 183+ days). You must prove where your “true home” is to change tax obligations.

Final Thoughts: Build a Smarter Retirement Plan Today

Tax planning doesn’t end at the federal level.
If you want to retire wealthier, you must think state-level too.

Whether you choose to move, optimize your investment strategies, leverage Roth accounts, or shield assets legally, the key is simple: Act early.

The sooner you start, the more you keep — and the wealthier your future self will be.

Visit contact physiciantaxsolutions.com to schedule a consultation and learn how we can help you take control of your tax strategy today.

This post serves solely for informational purposes and should not be construed as legal, business, or tax advice. Individuals should seek guidance from their attorney, business advisor, or tax advisor regarding the matters discussed herein. physiciantaxsolutions.com assumes no responsibility for actions taken based on the information provided in this post.