Generally, retirees pay taxes to the state they're living in regardless of where they earned their pension. In retirement or out of it, if you move across state lines, your taxes can become complicated. If you have pension income from the state you retired in and you then move somewhere else, you might have to pay tax on your pension to both states – or to neither state. If you pay tax on income from one state while living in another, ask your state of residence for a tax credit to prevent double taxation.
You can usually expect to pay taxes on your pension income in the state where you live. However, double taxation can apply if you end up moving to another state during the tax year.
Your Legal Residence
To figure out who gets your taxes, you have to first figure out your legal residence. If you retire in Minnesota but spend five months of the year in California, that doesn't make you a resident of both states. Your state of residence is the one you consider your real home, which you prove by registering to vote or by maintaining a driver's license there. As a resident of that state, you pay state income tax.
Moving to Another State
Suppose you retire in Delaware, then move to Ohio and make that your state of residence. The year you move, you may owe tax to both states: If you move on May 28, tax up to that point goes to Delaware; for the rest of the year – and the following years – it goes to Ohio. If you get your pension from a third state, you may have to pay tax on that income to that state too.
Laws in Specific States
Your specific situation will depend on the laws of the states involved. New York, for example, doesn't tax public pensions and exempts private pensions up to $20,000 per year. Florida has no state income tax, which is part of the reason retirees flock there. Texas, Nevada and Washington also forgo charging residents income tax.
Kansas, however, is much less accommodating to retirees. The state fully taxes pension income, no matter how great or small your pension may be.
Other Tax Considerations
When you're thinking about where you'd like to retire, state income taxes shouldn't be the only consideration. If you intend to buy a house, look at local property taxes, which vary from county to county. If it's an expensive retirement home, property taxes can take a big bite out of your bank account.
So can sales taxes: Chicago has a 10.25 percent sales tax, and parts of Alabama charge rates up to 11 percent. This shows it's important to look at the whole tax picture rather than just income tax.
- Kiplinger: State-by-State Guide to Taxes on Retirees
- Reuters: HIghest Sales Taxes Among U.S. Cities in Alabama
- Tax Act: State Residence for Tax Purposes
- Minnesota Department of Revenue: Residency
- Illinois Policy: Chicago's Sales Tax Now Highest in the Nation
- Avalara Inc.: Download Alabama Sales Tax Rate Table