States take different approaches to the tax treatment of retirement, pension, and Social Security income. Some states:
- 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.
How does your state stack up against other states? Are there other taxes you should consider as you plan for retirement? These are questions you need to ask your tax advisor.
What States Do Not Tax Retirement Income?
7 states do not tax individual retirement or other income.
2 states tax only dividend and interest income.
4 states exempt all or most retirement 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.
|New Jersey||New Mexico||New York|
|Oklahoma||Rhode Island||South Carolina|
3 states provide a credit for retirement or pension income.
What States Tax All or Most Retirement Income?
7 states and the District of Columbia tax all or most private retirement or pension income.
What States Tax Social Security Income?
|Nebraska||North Carolina||North Dakota|
13 states tax some or all Social Security income. Most of these states exempt a part of this income based on AGI thresholds.
|Nebraska||New Mexico||North Dakota|
What State Changes Took Place Over the Last Year?
|Connecticut:||Delayed an increase from 25% to 50% in the teacher retirement income exemption until January 1, 2021.|
|Indiana:||Phases in a deduction for all military retirement income over a 4-year period beginning in 2019.|
|North Dakota:||Established a deduction for all military retirement income for tax years beginning after 2018.|
What Does the Future Look Like?
States have not yet responded to the changes made by the Setting Every Community Up for Retirement Enhancement (SECURE) Act that:
- move the start date for required minimum IRA distributions to age 72;
- end the 70 ½ age limit for IRA contributions;
- shorten the distribution period for non-spouse inherited IRAs;
- allow small employers to access large IRC 401(k) plans through pooled multiemployer plans;
- add a new credit for small employers using auto-enrollment 401(k) plans; and
- streamline the safe harbor for non-elective 401(k) contributions.
In most states, individuals determine income tax liability starting with their federal AGI. So, taxpayers start with the amount of retirement income included in federal AGI before any state adjustments.
By Tim Bjur, J.D.