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Massachusetts Retirement Tax Friendliness

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Overview of Massachusetts Retirement Tax Friendliness

Massachusetts fully exempts Social Security retirement benefits while taxing most other forms of retirement income. The Massachusetts estate tax has an exemption of just $1 million, among the lowest in the U.S.

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You will pay of Massachusetts state taxes on your pre-tax income of
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Quick Guide to Retirement Income Taxes
is toward retirees.
Social security income is taxed.
Withdrawals from retirement accounts are taxed.
Wages are taxed at normal rates, your marginal state tax rate is %.
Public pension income is taxed, private pension income is taxed.
  • Our Tax Expert

    Jennifer Mansfield, CPA Tax

    Jennifer Mansfield, CPA, JD/LLM-Tax, is a Certified Public Accountant with more than 30 years of experience providing tax advice. SmartAsset’s tax expert has a degree in Accounting and Business/Management from the University of Wyoming, as well as both a Masters in Tax Laws and a Juris Doctorate from Georgetown University Law Center. Jennifer has mostly worked in public accounting firms, including Ernst & Young and Deloitte. She is passionate about helping provide people and businesses with valuable accounting and tax advice to allow them to prosper financially. Jennifer lives in Arizona and was recently named to the Greater Tucson Leadership Program.

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Massachusetts Retirement Taxes

Photo credit: ©iStock.com/omersukrugoksu

Planning a retirement in the Bay State? From Cape Cod to the Berkshire Mountains, there are many wonderful places to retire in Massachusetts – if you don’t mind a little snow.

The state’s tax system is similar to others in the region, in that it fully exempts Social Security retirement benefits while taxing most other forms of retirement income. Retirees for whom Social Security is the primary or sole source of retirement income will therefore face a fairly low tax bill. However, given the state’s high cost of living (26.2% above average), living off Social Security alone in Massachusetts may be difficult.

Below, we’ll tackle some of the most common questions seniors have about the Bay State’s retirement system. Along with the income taxes mentioned above, we’ll also take a look at sales, property and estate taxes.

Is Massachusetts tax-friendly for retirees?

Massachusetts is moderately tax-friendly for retirees. It fully exempts Social Security retirement benefits and income from public pension funds from taxation.

On the other hand, other types of retirement income receive no exemptions or deductions. Income from an IRA, 401(k), 403(b) or any other type of retirement savings account is taxed at the state income tax rate of 5.15%. Income from a non-public employer pension is also taxable.

Also of note: the Massachusetts estate tax has an exemption of just $1 million, among the lowest in the U.S. More on that below.

Is Social Security taxable in Massachusetts?

No. Retirees do not need to pay income taxes on their Social Security income in Massachusetts.

Are other forms of retirement income taxable in Massachusetts?

Yes. Income from any public employer pension (for example, the Massachusetts Teachers’ Retirement System) is exempt, but all other types of retirement income are taxable. If you plan on receiving income from a 401(k), IRA or non-public pension, keep in mind that you will pay the state tax rate of 5.15% on most of that income.

How high are property taxes in Massachusetts?

Effective property tax rates average 1.15% of home value but it’s important to keep in mind that Massachusetts has one of the most expensive overall housing markets in the country. The state’s median home value is $330,100.

As a general rule of thumb, prices rise as you head east. Cape Cod has among the priciest housing markets in the country. Boston and its suburbs are also relatively expensive. Home prices in the western half of the state are not as high.

Photo credit: ©iStock.com/DenisTangneyJr

What is the Massachusetts Circuit Breaker Credit?

Some seniors in Massachusetts are eligible for the Real Estate Tax Credit for Persons 65 and Older, also called the Circuit Breaker Credit. The credit refunds all property taxes paid, up to a maximum of $1,050. To be eligible, a senior has to meet four requirements.

First, the claimant must be at least 65 years old. Next, the claimant must own and occupy his or her home. Also, the claimant must have total income under $56,000 as a single filers, $70,000 as a head of household or $84,000 for joint filers. Lastly, the assessed value (as of January 1, 2014) of the home must be no more than $691,000.

How high are sales taxes in Massachusetts?

Massachusetts sales taxes are slightly lower than average. The statewide rate is 6.25%. There are a number of important exemptions to the sales tax. Groceries are exempt, as are clothing items costing less than $175. Prescription drugs are also exempt.

What other Massachusetts taxes should I be concerned about?

The Massachusetts estate tax is one of the steepest in the nation. The exclusion is $1 million, as compared with a federal exclusion of $5.9 million. Above that limit, tax rates begin at 0.8% and increase to 16% for the portion of any estate exceeding $10.04 million in taxable value.

Most Tax Friendly Places for Retirees

SmartAsset’s interactive map highlights the places in the country with tax policies that are most favorable to retirees. Zoom between states and the national map to see the most tax-friendly places in each area of the country.

Highest
Lowest
Rank City Income Tax Paid Property Tax Rate Sales Tax Paid Fuel Tax Paid Social Security Taxed?

Methodology Our study aims to find the areas with the most tax-friendly policies for retirees. To do that we looked at how the tax policies of each city would impact a retiree with a $50,000 income. Our hypothetical retiree is getting $15,000 from Social Security benefits, $10,000 from a private pension, $15,000 from retirement savings like a 401(k) or IRA and $10,000 in wages.

To calculate the expected income tax this person would pay in each location we applied deductions and exemptions. This included the standard deduction, personal exemption and deductions for each specific type of retirement income. We then calculated how much this person would pay in income tax at the federal, state, county and local levels.

We calculated the effective property tax rate by dividing median property tax paid by median home value for each city.

In order to determine sales tax burden we estimated that 35% of take-home (after-tax) pay is spent on taxable goods. We multiplied the average sales tax rate for a city by the household income less income tax. This product is then multiplied by 35% to estimate the sales tax paid.

For fuel taxes, we first distributed statewide vehicle miles traveled down to the city level using the number of vehicles in each county. We then calculated miles driven per capita in each city. Using the nationwide average fuel economy, we calculated the average gallons of gas used per capita in each city and multiplied that by the fuel tax.

For each city we determined whether or not Social Security income was taxable.

Finally, we created an overall index weighted to best capture the taxes that most affect retirees. We gave a 4x weighting to income tax, 3x weighting to property tax rate, a 2x weighting to sales tax and 1x weighting to fuel tax.

Sources: Internal Revenue Service, Social Security Administration, state websites, local government websites, US Census Bureau 2016 American Community Survey, Avalara, American Petroleum Institute, GasBuddy, UMTRI, Federal Highway Administration