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Minnesota Retirement Tax Friendliness

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Overview of Minnesota Retirement Tax Friendliness

Minnesota taxes Social Security retirement benefits and all other forms of retirement income. Sales taxes in the state are relatively high, while property taxes are close to average.

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You will pay of Minnesota state taxes on your pre-tax income of
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is toward retirees.
Social Security income is taxed.
Withdrawals from retirement accounts are taxed.
Wages are taxed at normal rates, and your marginal state tax rate is %.
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Minnesota Retirement Taxes

Photo credit: ©iStock.com/omersukrugoksu

If warm winters or low taxes are a priority for your retirement, Minnesota probably isn’t the state for you. It is one of the few states that taxes Social Security income. It also taxes other forms of retirement income while providing no deduction or exemption for seniors. In other words, if you’re a retiree in Minnesota expect to pay taxes on your retirement income at rates from 5.35% to 9.85%.

Sales taxes in the Land of One Thousand Lakes are relatively high, while property taxes are close to average. Below, we’ll answer some of the most common questions for seniors considering a retirement in Minnesota.

Is Minnesota tax-friendly for retirees?

No. Minnesota taxes Social Security income and all other forms of retirement income. Income tax rates in Minnesota are among the highest in the country, ranging from 5.35% to 9.85%. Meanwhile, its sales and property taxes are not particularly low. The total state and average local sales tax rate is 7.3%. The average effective property tax rate is 1.17%, close to the national average. Minnesota also has an estate tax.

Is Social Security taxable in Minnesota?

Yes. Any Social Security income that is included in Adjusted Gross Income (AGI) on your federal tax return will be subject to income tax in Minnesota. That income, in combination with any work income and all other retirement income, will be taxed at the rates shown in the table below.

Income Tax Brackets

Single Filers
Minnesota Taxable IncomeRate
$0 - $25,3905.35%
$25,390 - $83,4007.05%
$83,400 - $156,9007.85%
$156,900+9.85%
Married, Filing Jointly
Minnesota Taxable IncomeRate
$0 - $37,1105.35%
$37,110 - $147,4507.05%
$147,450 - $261,5107.85%
$261,510+9.85%
Married, Filing Separately
Minnesota Taxable IncomeRate
$0 - $18,5605.35%
$18,560 - $73,7307.05%
$73,730 - $130,7607.85%
$130,760+9.85%
Head of Household
Minnesota Taxable IncomeRate
$0 - $31,2605.35%
$31,260 - $125,6007.05%
$125,600 - $209,2007.85%
$209,200+9.85%

Are other forms of retirement income taxable in Minnesota?

Yes. All other retirement income is fully taxable in Minnesota. There are no exemptions for pension income or income from retirement savings accounts (like a 401(k) or an IRA). Any retirement income you receive while living in Minnesota will be taxed at the rates outlined in the table above.

How high are property taxes in Minnesota?

Minnesota property taxes are close to the national average. The typical Minnesota homeowner spends about $2,200 annually on property taxes. The state’s average effective property tax rate is 1.17%. That rate is just below the national average, but housing costs overall are about 7% above average in Minnesota.

What is the Minnesota senior citizens property tax deferral program?

The Minnesota senior citizens property tax deferral program is a form of property tax relief available to seniors below a certain household income threshold. To qualify, you must be age 65 or older with a household income of $60,000 or less.

Homeowners who are enrolled in the program pay a maximum of 3% of their household income on property taxes each year. The state pays any remainder on your behalf. However, that excess tax amount is deferred and must eventually be paid back with interest. This is typically done with the proceeds of an eventual home sale.

Photo credit: ©iStock.com/GeorgePeters

How high are sales taxes in Minnesota?

Fairly high. The statewide rate is 6.875%. It is the sixth highest in the U.S. Additionally, cities and counties can collect their own rates of up to 1.5%. On average, the total rate in Minnesota is 7.3%. In Minneapolis, the rate is 7.525%.

Those rates do not apply to all items, however. Most groceries and most types of clothing are exempt from sales tax in Minnesota. All medicine, including both prescription and non-prescription drugs, is exempt from sales tax.

What other Minnesota taxes should I be concerned about?

Seniors who intend to leave any property or wealth to their loved ones may be affected by the Minnesota estate tax. The exemption on that tax is currently $2.4 million for 2018. The exemption is also scheduled to increase to $2.7 million for 2019 and $3 million for 2020 and beyond. Estates with a value below the exemption amount will not be taxed. Tax rates for estates above that exemption range from 10% to 16%.

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