Tax treatment of retirement, pension, and Social Security income varies widely from state to state. a question a growing number of baby boomers who are thinking about retirement need to ask is: how will my state tax my income when I retire?
- impose no income tax on retirement, pension, and other income;
- exempt all or some retirement, pension, and Social Security income;
- provide credits for retirement and pension income; or
- tax all retirement and pension income.
If the answer is unclear or undesirable, a tax advisor can help navigate state tax laws so you can make the best decisions for your retirement.
What States Do Not Tax Retirement Income?
Seven states do not tax individual retirement, pension, or other income.
Two states impose tax only on dividend and interest income.
Three states exempt all retirement, pension, and Social Security income.
What States Tax Some Retirement Income?
27 states tax some, but not all, retirement or pension income. Many of these states limit the exemption amounts based on Adjusted Gross Income (AGI) thresholds.
|Michigan||Missouri||Montana||New Jersey||New Mexico|
|New York||Oklahoma||Rhode Island||South Carolina||Virginia|
Three states provide a credit for retirement or pension income.
What States Tax All or Most Retirement Income?
Eight states and the District of Columbia tax all or most retirement or pension income.
|California||Connecticut||District of Columbia|
|North Carolina||North Dakota||Vermont|
What States Tax Social Security Income?
13 states tax some or all Social Security income. Most of these states exempt a part of this income based on AGI thresholds.
|Montana||Nebraska||Indiana||New Mexico||North Dakota|
|Rhode Island||Utah||Vermont||West Virginia|
What Does the Future Look Like?
Most recent legislative proposals to change the taxation of retirement income have occurred in a handful of states. These states include:
- New Jersey; and
- Rhode Island.
Most of the proposals died with a few exceptions. Connecticut enacted legislation that:
- phases-out the taxation of retirement and pension income; and
- increases the AGI deduction threshold for Social Security income beginning in 2019.
Several states enacted legislation that exempts or increases deductions for military pension income. These states include:
- Michigan; and
- West Virginia.
West Virginia Gov. Jim Justice made eliminating the tax on Social Security income a centerpiece of his 2019 State of the State address. Indiana Gov. Eric Holcomb proposed ending the tax on military pension income in his State of the State address.
Income Tax Plan As Retirement Draws Near
A variety of nontax factors can play a bigger role than taxation of retirement income in where retirees choose to spend their golden years. These factors can include:
- family and friend networks;
- healthcare costs and options;
- real estate, grocery, gasoline, and other basic living costs;
- transportation options; and
- relocation costs.
And, of course, tax treatment of retirement income isn’t the only factor to think about. What a state loses in revenue by providing favorable treatment to retirement income, it can make up by relying on more revenue from:
- sales and use taxes;
- property taxes;
- estate taxes; and/or
Thus, where you own property, as your residence or for rental, can also impact your retirement plan. Estate taxes may be an important factor as well.
A tax advisor can also sort through these state taxes with you as you make an income tax plan for retirement.
By Tim Bjur, J.D.
To learn about federal taxes on retirement and pension income, click here