Do You Pay Taxes on Pensions From the State You Retired In or the State You're Living In?

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As each state sets its own tax code, there is no general rule for paying retirement taxes to your state of residence. However, it is important to note you will pay taxes to the state you are currently living in, regardless of where you previously lived when you deposited the savings. How much you will pay, though, depends on the tax code of each state.

Background

  • When you deposit savings into a retirement account, you have one of two options: pay taxes now with a Roth option, or pay taxes later with a traditional option. If you are on a Roth plan, you do not have to worry about distribution taxes on earnings. If you have a traditional account, and most people will have at least one income from a pension or traditional account, you will be taxed on the money you earn. You will owe both a federal income tax and a state income tax reported on your annual Form 1040.

Considerations

  • Each state treats retirement income differently. For example, some states do not tax income from military or state pensions. If you receive a military pension, you may consider living in one of these states to make your money go further. Other states, like Arizona, do not tax retirement income at all. However, Arizona is a great example because it does tax the income if you earned it in another state. So, if you earned the income in Arizona and stayed there until retirement, you owe nothing; however, if you earned the income in California and moved to Arizona, you will be taxed. This type of intricate tax code is tricky to broadly define.

Benefits

  • As you retire, it is important to make your money last through the remainder of your life. Therefore, it is desirable to live in a state with low or no taxes on retirement income. If you can arrange this, even if you earned your income in a state that would tax the benefits, you will be receiving greater tax advantages by moving.

Laws & Regulations

  • If you lived in any state for even a single day out of a given year, you will have to report your income received in that state to the state tax board. Keep this in mind when reporting taxable income. If you have homes in more than one state, you will declare primary residency in just one state where your checks are sent. This is the state where you will pay taxes on that income. Often, state laws regarding how many months you can live in a given state without paying taxes will affect this reporting requirement. Finally, remember you still have to report your income even if you do not believe you will owe taxes on it. At times, states will exempt you up to a certain income limit, and then you will owe taxes for additional earnings. Reporting the income is the key to avoiding tax fraud.

References

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