State Income Taxes in Retirement
Out of all 43 states with personal income taxes, 38 states have some type of exemption for retirement income. However, each state has a different mix of income tax breaks for retirees. Most states exempt certain types of retirement income, but tax others. Only two states exempt all retirement income, so unless you're able to retire in a state with no income tax (which may have high taxes in other areas), you should consider state income taxes before deciding where to retire.
States That Exempt Social Security
The District of Columbia and 28 other states exempt all Social Security benefits from income taxes, including: Alabama, Arizona, Arkansas, California, Delaware, Georgia, Hawaii, Idaho, Illinois, Indiana, Iowa, Kentucky, Louisiana, Maine, Maryland, Massachusetts, Michigan, Mississippi, New Jersey, New York, North Carolina, Ohio, Oklahoma, Oregon, Pennsylvania, South Carolina, Virginia, and Wisconsin.
Taxing Social Security
The remaining states with personal income taxes include Social Security benefits in taxable income to some extent:
- Connecticut, Kansas, Missouri, Montana, and Nebraska tax Social Security benefits depending on the taxpayer's income level. For example, Connecticut taxes a portion of Social Security income for single taxpayers with an adjusted gross income (AGI) of over $50,000 ($60,000 for married filing jointly). Kansas taxes Social Security benefits of taxpayers with AGIs over $75,000.
- Colorado, New Mexico, and Utah only exclude portions of Social Security income depending on the taxpayer's age. For example, Colorado allows taxpayers aged 55-64 to exclude $20,000 of Social Security and qualified retirement income. Taxpayers 65 and over can exclude $24,000. Anything over the exclusion amounts would be taxed.
- Minnesota, North Dakota, Rhode Island, Vermont, and West Virginia tax Social Security income to the extent it's taxed on the taxpayer’s federal return.
State Tax Exemptions for Military Pensions
Some states exempt military pensions from income taxes entirely: Alabama, Hawaii, Illinois, Kansas, Kentucky (for those who retired before 1997), Louisiana, Massachusetts, Michigan, Mississippi, Missouri, New Hampshire, New Jersey, New York, Ohio, Pennsylvania, and Wisconsin.
Many other states allow for some portion of military pension income to be excluded.
State Taxes and Government Pensions
Federal laws dictate that state tax policy cannot discriminate against federal civil service pensions. It means they can't have more favorable tax treatment for state and local pensions than they do for federal civil service pensions. But they can create tax policies that discriminate between their own state pensions and other state’s pensions.
Arizona, Idaho, Kansas, Louisiana, New York, Oklahoma, and the District of Columbia provide greater tax relief plans for their state’s pension plans than for out-of-state government pension plans.
Only 11 states exclude all federal, state, and local pension income from taxation: Alabama, Hawaii, Illinois, Kansas, Louisiana, Massachusetts, Michigan, Mississippi, Missouri, New York, and Pennsylvania.
State Taxes and Private Pensions
State income tax exclusions for private pension income are not as generous as those for Social Security and public pensions. Twelve states and the District of Columbia fully tax private pensions. Those states are Arizona, California, Idaho, Indiana, Kansas, Massachusetts, Minnesota, Nebraska, North Dakota, Rhode Island, Vermont, and West Virginia.
On the other hand, Alabama, Hawaii, and Illinois exempt nearly all retirement income. They exempt 100 percent of Social Security, military pensions, government pensions, and certain types of private pensions. Only Mississippi and Pennsylvania exempt all retirement income, including 401(k) and IRA distributions.
The Unfriendly States for Retirees
Four states allow no exclusions for pension and other retirement income: Minnesota, Nebraska, Rhode Island, and Vermont California has only a small tax credit for senior citizens and excludes only Social Security benefits and railroad retirement benefits from income taxes.