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South Dakota Retirement Tax Friendliness

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Overview of South Dakota Retirement Tax Friendliness

There is no state income tax in South Dakota. This means Social Security, pensions and other forms of retirement income are all tax-free. Sales taxes are quite low in South Dakota, and though property taxes are moderate, low-income seniors can offset those costs.

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You will pay of South Dakota 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, and your marginal state tax rate is %.
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    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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South Dakota Retirement Taxes

Photo credit: ©iStock.com/omersukrugoksu

If you’re considering a relocation for your retirement and you’re concerned about taxes, South Dakota may be a good choice. The state’s tax system is among the most retiree-friendly in the country. It has no income tax, relatively low sales taxes, moderate property taxes and no estate or inheritance tax.

Living costs in South Dakota are average. In fact, in many parts of the state, retirees can afford the basic cost of living with the average Social Security income alone. Of course, seniors who dislike cold weather might find South Dakota unpleasant. The average high temperature for the month of January in Sioux Falls is 26 degrees Fahrenheit.

Is South Dakota tax-friendly for retirees?

Yes. In fact, South Dakota is among the most tax-friendly states in the country for retirees. There is no state income tax in South Dakota. This means Social Security, pensions and other forms of retirement income are all tax-free. Additionally, sales taxes are quite low. Property taxes are moderate, but low-income seniors can offset the costs.

Is Social Security taxable in South Dakota?

No. Social Security is not taxed at the state level in South Dakota. In fact, South Dakota has no income tax whatsoever. That means it does not tax any forms of income: Social Security, wages, investment income and so on.

Are other forms of retirement income taxable in South Dakota?

No. Any income from a 401(k), an IRA, a pension or any other source you can imagine will not be taxed at the state level. Keep in mind, however, that you may still owe federal taxes on those income sources.

How high are property taxes in South Dakota?

Property tax rates in South Dakota are somewhat higher than average, but in general, the cost of living in South Dakota is fairly low. According to the U.S. Census Bureau, the value of the median home in Sioux Falls (the largest city in South Dakota) was $161,500 for 2016. The national median was about $185,000.

If you do own a home in South Dakota you can expect to pay around 1.3% of your home value annually in property taxes. There are some programs to help seniors with high property tax bills in South Dakota, as described below.

Photo credit: ©iStock.com/eravau

What is the South Dakota homestead exemption?

South Dakota allows people over the age of 70 with income below a certain level to delay payment of all property taxes until their home is sold. You still owe property taxes, and they accrue interest at a rate of 4% annually. But you can pay them off with the proceeds of an eventual home sale. The income restrictions are as follows: total income less than $16,000 per year for single-person households or total income less than $20,000 per year for multiple person households (including all income sources).

Additionally, in some cities seniors can also apply to have their municipal taxes from the previous year reduced. This is called the Property Tax Reduction from Municipal Taxes. You must be at least 65 years old to apply. You can have income no higher than $5,757 (for single householders) or $7,764 (for multiple person households). The reduction ranges from 55% to 16% for people who meet these requirements, depending on your level of income.

How high are sales taxes in South Dakota?

Not very. The statewide rate is 4.5% and most major cities collect an additional rate of 2%. However, medical services and prescription drugs are not taxed. Purchases made with food stamps are also tax-free.

What other South Dakota taxes should I be concerned about?

None. There is no estate tax in South Dakota and the inheritance tax was repealed in 2000. Really, the only taxes retirees moving to South Dakota need to keep in mind are federal taxes on income and the federal estate tax. These apply regardless of where you live.

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