States That Don't Tax Federal or State Pensions
A total of 17 states decline to tax residents on federal or state pension income as of the date of publication. Some have no income tax at all; others specifically exempt pensions from taxation. A handful of other states are tax-friendly to retirees in other ways. All told, if you're looking to retire without an undue tax burden, roughly half of the United States tries to accommodate you to some extent.
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States With No Income Tax
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It doesn't matter where your income comes from in Wyoming, Alaska, Florida, Washington, Nevada, Texas and South Dakota. These seven states have no income tax. An additional two states, New Hampshire and Tennessee, have no income tax, but they will tax interest income. If you're using the interest from investments to help you make ends meet in retirement, these states take a portion of it.
States That Exempt Government Pensions
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An additional ten states impose income taxes, but not on state or federal pensions. In Alabama, Pennsylvania, Hawaii, New York, Illinois, Mississippi, Kansas, Michigan, Louisiana and Massachusetts, your pension income is tax-free, but this is only true in Michigan through 2011. Kansas also exempts Social Security if your total adjusted gross income is less than $75,000 annually. Alabama, Hawaii, Mississippi and Illinois exempt certain private retirement plans from taxation as well.
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States With Other Exemptions
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Alaska, Florida, Nevada, New Hampshire, New Jersey, Ohio, South Dakota, Tennessee, Texas, Washington, Wisconsin and Wyoming do not tax military pensions. An additional four states decline to tax most military pensions, but have some restrictions: Kentucky, Missouri, North Carolina and Oregon. Arizona, Oklahoma, Idaho and the District of Columbia offer some tax breaks for in-state pensions.
Retirement States to Avoid
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California won't impose a tax on your Social Security income, but it taxes all pensions. Nebraska taxes Social Security; the state exempts only railroad retirement benefits. Minnesota and Vermont tax pension income, up to 7.85 percent in Minnesota and 8.95 percent in Vermont. Vermont also exempts railroad retirement benefits, however. Connecticut exempts 50 percent of military pensions, but nothing else, and if your adjusted gross income is more than $50,000, or $60,000 if you're married and filing jointly, the state will also tax your Social Security. Rhode Island taxes all retirement income, including Social Security, although its tax rate is only 5.99 percent. Colorado, Iowa, Montana, New Mexico, North Dakota, West Virginia and Utah also tax Social Security to some extent.
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References
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