Is Retirement Income Exempt From State Income Taxes?

Retirement income can arrive from a variety of finanial sources. Whether it be social security benefits, retirement compensation from a company, 401K proceeds, military compensation or financial investments, retirement income can be taxable in the state where you reside. However, there are some types of retirement income that are exempt in many states. Depending on where your primary residence is located, you may qualify for certain state retirement income tax exemptions. Each state has its own specific tax laws, but a few detailed guidelines will help you understand where you may be able to claim exemptions.

Adjusted Gross Income

Calculate your adjusted gross income (AGI) using your retirement wages, social security income and retirement pensions. Your AGI is a federal amount of taxable income that is often used as a basis for determining your state taxable income. Using IRS.gov, research your state's guidelines to determine how your AGI is used to calculate your state retirement income tax liability.

Social Security Benefits

Calculate your Social Security retirement benefits. According to retirementliving.com, the District of Columbia and 27 states with income taxes provide a full exclusion for Social Security benefits. Those states include: Alabama, Arizona, Arkansas, California, Delaware, Georgia, Hawaii, Idaho, Illinois, Indiana, Kentucky, Louisiana, Maine, Maryland, Massachusetts, Michigan, Mississippi, New Jersey, New York, North Carolina, Ohio, Oklahoma, Oregon, Pennsylvania, South Carolina, Virginia and Wisconsin. The remaining 14 states tax Social Security to some extent. Minnesota, Nebraska, North Dakota, Rhode Island, Vermont and West Virginia tax Social Security income to the extent it is taxed by the federal government. Connecticut, Iowa, Kansas, Missouri and Montana tax Social Security income above an income floor. Colorado, New Mexico and Utah require that federally untaxed Social Security benefits be added back into federal AGI to calculate the base against which their income exclusions apply.

Military Pensions

Determine your military pension. According to retirementliving.com, states are not allowed to tax the benefits of U.S. military retirees if they exempt the pensions of state and local government retirees. Most states that impose an income tax on retirement income will exempt a part of military pension income from taxable income. Different types of pension income (private, military, federal civil service and state or local government) are often treated differently for tax purposes. According to military.com, the states that do not tax retired military pay are: Alabama, Alaska, Florida, Hawaii, Illinois, Kansas, Kentucky, Louisiana, Massachusetts, Michigan, Mississippi, Missouri, Nevada, New Hampshire, New Jersey, New York, North Carolina, Ohio, Oregon, Pennsylvania, South Dakota, Tennessee, Texas, Washington, Wisconsin and Wyoming.

Other Pensions

Figure the amount of retirement income that you receive as pension. According to retirementliving.com, states are generally free from federal control in deciding how to tax pensions. State tax policy cannot discriminate against federal civil service pensions. Ten states exclude all federal, state and local pension from taxation; they include: Alabama, Hawaii, Illinois, Kansas, Louisiana, Massachusetts, Michigan, Mississippi, New York and Pennsylvania. Five states including: California, Connecticut, Nebraska, Rhode Island, and Vermont allow no exemptions or tax credits for pension and other retirement income that is counted in federal adjusted gross income. Most in-state government pensions are taxed the same as out-of-state government pensions. However, Arizona, Idaho, Kansas, Louisiana, New York, and Oklahoma provide greater tax relief plans than they do for out-of-state government pension plans. The District of Columbia also provides greater tax relief for DC government pensions than for state government pensions. Some exemptions do not qualify if they are purely private-sector pensions. Consult your state tax department for details if your pension is from the private sector.

Other Tax Considerations

Research the property tax values before you relocate for retirement. Many states are praised for their low income tax rates, including tax on retirement income, but actually have high property taxes. Avoid choosing a state in which to retire that has a higher than average personal property tax. Tax on personal property can quickly add up to more than income tax on retirement income. Consider all tax requirements in a particular state to determine the lowest overall cost of living and minimum tax burden.

References

• Taxes by State
• State Personal Income Taxes on Pensions and Retirement Income: Tax Year 2009
• State Requirement Income Tax

Resources

• Which State Gives Retirees the Best Deal