Is My Pension Subject to State Taxes?

High taxes can quickly shrink your retirement nest egg.

High taxes can quickly shrink your retirement nest egg.

There’s a reason many people move out of state as soon as they’ve retired. It’s not always a move from a cold climate to a warmer climate, although that is often a factor. Once retired and on a fixed income, they want to live in a more tax-friendly state. If you receive a pension, you likely want to live in a state that doesn’t impose taxes on your pension income.

Tip

Some states impose taxes on pensions, while others do not.

Pension Taxes in Retirement

No matter where you live in the U.S., your pension is subject to federal taxes. The IRS states that pensions are fully taxable if you didn’t contribute funds to the pension, your employer didn’t withhold salary contributions and all contributions were received tax free in prior years. A pension is partially taxable if you contributed any after-tax dollars to it. You’ll also pay a 10 percent penalty should you take pension payments before the age of 59 ½.

Even if your current state does impose a pension tax, you have an option, and that’s moving to a state with no such tax. As the Financial Industry Regulatory Authority points out, “States can’t tax pension money you earned within their borders if you’ve moved your legal residence to another state.” That’s just one reason, besides sunshine and palm trees, that Florida is such a common destination for retirees. It doesn’t impose a state income tax.

States With No Income Tax

Currently, states with no income tax, meaning they also do not tax pensions, consist of:

  •         Alaska
  •         Florida
  •         Nevada
  •         New Hampshire
  •         South Dakota
  •         Tennessee
  •         Texas
  •         Washington
  •         Wyoming

Keep in mind that New Hampshire and Tennessee tax certain interest and dividends, although Tennessee plans to phase out these taxes by 2021.

States That Don’t Tax Pension Income

In addition to the states that don’t have an income tax, there are others that don’t tax qualified retirement income, including pensions. That is true of the following states:

  •          Illinois
  •          Mississippi
  •          Pennsylvania

States That Partially Exempt Pension Income

Some states offer exemptions or credits for part of pension income. These include:

  •          Alabama
  •          Arkansas
  •          Colorado
  •          Delaware
  •          Georgia
  •          Hawaii
  •          Iowa
  •          Kentucky
  •          Louisiana
  •          Maine
  •          Maryland
  •          Michigan
  •          Missouri
  •          Montana
  •          New Jersey
  •          New Mexico
  •          New York
  •          Ohio
  •          Oklahoma
  •          Oregon
  •          South Carolina
  •          Utah
  •          Virginia
  •          Wisconsin

States That Tax Pension Income

Then there are the states that treat pension income as ordinary income and tax it accordingly. These states include:

  •          Arizona
  •          California
  •          Connecticut
  •          District of Columbia
  •          Idaho
  •          Indiana
  •          Kansas
  •          Massachusetts
  •          Minnesota
  •          Nebraska
  •          North Carolina
  •          North Dakota
  •          Rhode Island
  •          Vermont
  •           West Virginia

A few of these states imposing a pension tax are still popular retirement destinations. Climate isn’t the only reason. Other factors, including low property taxes and cost of living, draw retirees there. How a state taxes your pension is an important component in deciding where you will spend your golden years, but don’t lose sight of other tax considerations when you make your decision.

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About the Author

A graduate of New York University, Jane Meggitt's work has appeared in dozens of publications, including PocketSense, Zack's, Financial Advisor, nj.com, LegalZoom and The Nest.

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