State Income Tax on Retirement Income: Which States Tax Social Security and Pensions

Federal income tax rules for Social Security and pensions get a lot of attention, but state tax rules matter just as much - and they vary enormously from one state to the next. The state you live in can mean the difference between paying several thousand dollars in additional tax on your retirement income each year or paying nothing at all. This guide explains the major patterns and how to find the specifics for your state.

States With No Income Tax at All

Nine states have no state income tax: Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming. If you live in any of these states, state income tax is simply not a factor for your retirement income.

How Do States Tax Social Security Income?

Most states do not tax Social Security benefits at all, and the trend has been moving further in that direction — several states have eliminated or significantly reduced Social Security taxes in recent years. A smaller number of states do tax benefits, but most of those offer generous income-based exemptions that protect low- and moderate-income retirees. Always check your state's current rules directly, as this area changes frequently.

At the federal level, up to 85% of Social Security can be taxable depending on your combined income. At the state level, the picture is more favorable for most retirees. Many states do not tax Social Security benefits, though state tax rules vary and can change. Check with your state's tax agency for the most current information.

A smaller number of states do tax Social Security to some degree, and most of those that do offer substantial exemptions based on income. In many cases, the exemption thresholds are set high enough that low- and moderate-income retirees owe no state tax on their benefits even in states that technically "tax" Social Security. The details change frequently as states have been progressively reducing or eliminating these taxes in recent years, so it is worth checking the current rules for your state directly.

How Do States Tax Pension Income?

State treatment of pension income varies significantly. Some states fully exempt government or military pensions while taxing private pensions; others provide a general retirement income exclusion that covers all types up to a dollar cap. A few states with income taxes treat pension income like any other ordinary income. The category of pension — federal, state, military, or private — often determines which exemption applies.

Pension income - from government pensions, private pensions, and employer plans - is handled differently by each state, and within states there are often distinctions between categories:

• Government pensions (federal, state, military) - some states fully exempt these; others treat them more favorably than private pensions; a few states offer no special treatment
• Private pensions - many states provide partial exemptions or income-based exclusions for private pension income
• Military retirement pay - many states have enacted full or partial exemptions for military retirement income in recent years

A number of states offer a general retirement income deduction or exclusion that covers pension income, Social Security, and sometimes IRA withdrawals up to a certain dollar amount. These deductions may have age or income requirements that vary by state, so it is worth checking your state's rules directly to see what applies to your situation.

IRA and 401(k) Withdrawals

In many states, traditional IRA and 401(k) withdrawals may be treated as ordinary income and taxed at the state's regular income tax rate, though state rules vary. Check with your state tax agency or a tax professional to find out how your withdrawals are treated where you live. A few states that provide broad retirement income exclusions extend those exclusions to IRA and 401(k) distributions as well, up to the exemption cap.

How Do You Find Your State's Exact Tax Rules?

Go directly to your state's department of revenue or taxation website and search for your state name plus "retirement income tax" or "Social Security exemption." AARP also maintains a regularly updated state-by-state guide that serves as a useful starting point. State tax rules change often enough that information from a prior year or a general summary may be out of date.

State tax law is specific and changes regularly. The best way to find current rules is to go directly to your state's department of revenue or department of taxation website. Search for "[your state] retirement income tax" or "[your state] Social Security exemption." AARP also maintains a state-by-state guide to retirement income taxes that is updated regularly and can serve as a useful starting point before you dig into the official rules.

If you are considering moving to a different state in retirement and the tax treatment of your income is a factor, run the numbers carefully - and also account for that state's property taxes, sales taxes, and cost of living, which together often matter more than income tax alone.