Recently, there has been much discussion of the state of Minnesota's tax impact on retirees. The discussion has focused primarily on the taxation of Social Security benefits. However, Minnesota taxes impact pensions and other retirement benefits just as hard for it does not make any exceptions if the retirement benefit is a military, private, or government pension.
According to Kiplinger Magazine (August 2013), Minnesota is ranked #4 in least tax-friendly states for retirees. The top 10 least tax-friendly states are:
10. New York
9. New Jersey
8. California
7. Nebraska
6. Oregon
5. Montana
4. Minnesota
3. Connecticut
2. Vermont
1. Rhode Island
All these states have many things in common: high income tax rates, sales, and property tax rates. The tax impact differences from state to state depend on the how high the income tax rate is compared to another state, what exemptions to sales taxes exist in the state, and differences in property tax rates based on home values in the individual states.
In Minnesota, 2013 saw the addition of another tax bracket for those making higher incomes. The new bracket is 9.85% for singles with taxable income of more than $150,000 and married couples having more than $250,000 in taxable income.
Minnesota does have one of the highest sales tax rates of the Top 10 least tax-friendly states. The general rate is 6.875%, and can include a .25% transit tax for the Minneapolis metro area along with a .15% stadium tax in Hennepin County (Twins Stadium financing). And, keep in mind, some cities such as Minneapolis and St. Paul, impose a city sales tax as well (.5%). Minnesota does have exemptions for sales taxes: no tax is imposed on the purchase of food, clothing, or prescription drugs.
Minnesota is one of 13 states that tax social security benefits. It is one of a few states that tax these benefits to the full extent the IRS taxes these benefits (up to 85% of benefits received).
If you would like more information on the tax impact by state, click here for the Kiplinger article.