Making Your Money Last

State Taxes on Retirees Differ by Types of Retirement Income

Where you retire can have a big impact on your tax bills for Social Security, pensions, IRAs, 401(k)s and other income.

Depending on which state you retire in, your state income tax bill could vary by thousands of dollars. But it’s not just a state’s tax rate that matters. In fact, the type of income you receive in retirement often has a greater impact on your state tax liability than the tax rate you pay. That’s because each state has its own way of taxing certain types of retirement income.

Here’s a look at how states tax two common forms of retirement income: Social Security benefits and retirement plan payouts. Use Kiplinger’s state-by-state guide to taxes on retirees to do a deep dive into the details for each state.

Taxes on Social Security benefits. While Uncle Sam taxes up to 85% of Social Security benefits, most states don’t tax Social Security benefits at all. Seven states—Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming—don’t tax Social Security benefits because they don’t have an income tax. New Hampshire and Tennessee only tax interest and dividends. Social Security benefits are exempt from tax in the District of Columbia and 28 states: Alabama, Arizona, Arkansas, California, Delaware, Georgia, Hawaii, Idaho, Illinois, Indiana, Iowa, Kentucky, Louisiana, Maine, Maryland, Massachusetts, Michigan, Mississippi, New Jersey, New York, North Carolina, Ohio, Oklahoma, Oregon, Pennsylvania, South Carolina, Virginia and Wisconsin.

That leaves 13 states where a portion of Social Security benefits may be taxable. New Mexico, Utah and West Virginia currently tax Social Security benefits to the same extent they are taxed on the federal return. However, West Virginia will start phasing out its tax on Social Security benefits in 2020. Taxation of Social Security benefits in the remaining states—Colorado, Connecticut, Kansas, Minnesota, Missouri, Montana, Nebraska, North Dakota, Rhode Island and Vermont—depends on your income and, in many cases, on your filing status.

Some of these states fully exempt Social Security for taxpayers under certain income thresholds. In Kansas, for example, Social Security benefits are completely exempt from state tax if your federal adjusted gross income (AGI) is $75,000 or less, regardless of your filing status. Starting in 2019, single North Dakota residents can fully exclude Social Security benefits from state taxable income if their federal AGI is $50,000 or less, while married residents filing a joint return can claim the exclusion with a federal AGI of $100,000 or less. Missouri offers partial exemptions for joint filers with federal AGI above $100,000 and all other filers with AGI over $85,000, while Missouri taxpayers with income below these thresholds can get a full state tax exemption. The remainder of the states have their own formulas for determining whose Social Security benefits are taxed and to what degree.

Retirement plan payouts. The state taxation of payouts from retirement plans—pensions, IRAs, 401(k)s and the like—is more complicated. The states without an income tax or that just tax interest and dividends don’t tax retirement plan payouts. For the other states, it’s a mixed bag. Mississippi and Pennsylvania are the most generous. They generally don’t tax any retirement income. On the flip side, California, D.C., Nebraska and Vermont are some of the stingiest—they offer little or no tax breaks for retirement plan payouts. Many of the states in between offer credits or deductions ranging from a few hundred bucks to tens of thousands of dollars. Georgia offers the largest tax break—a $65,000 retirement-income exclusion for anyone age 65 and older (couples can shelter up to $130,000).

In some cases, the type of retirement plan involved makes a difference. Kansas, for example, exempts income from government pensions, but it taxes private pension payouts. Alabama taxes defined-contribution plan distributions but not private pension payouts. And starting in 2019, North Dakota exempts military retirement pay but not other retirement plan payouts.

Most Popular

Your Guide to Roth Conversions
Special Report
Tax Breaks

Your Guide to Roth Conversions

A Kiplinger Special Report
February 25, 2021
How to Calculate the Break-Even Age for Taking Social Security
social security

How to Calculate the Break-Even Age for Taking Social Security

When it comes to maximizing your Social Security benefits, there are many elements to consider. One factor that can be especially enlightening is your…
August 30, 2021
Spend Without Worry in Retirement
Financial Planning

Spend Without Worry in Retirement

Fears of running out of money prevent many retirees from tapping the nest egg they’ve worked a lifetime to save. With these strategies, you can genera…
August 30, 2021

Recommended

What Is the Social Security COLA?
retirement

What Is the Social Security COLA?

This year especially, cost-of-living adjustments are late to the party, as consumers are feeling the effect of price spikes now.
September 16, 2021
Retirees Likely to Receive Significant Bump in Social Security Benefits in 2022
social security

Retirees Likely to Receive Significant Bump in Social Security Benefits in 2022

The cost-of-living adjustment for Social Security benefits for next year is expected to be the largest since 1982.
September 16, 2021
5 Key Points to Consider Before You Claim Social Security
social security

5 Key Points to Consider Before You Claim Social Security

The big decision every retiree has to make is when to start taking their Social Security benefits. Here are five things to think about as you weigh yo…
September 16, 2021
The Downside of Delaying RMDs
required minimum distributions (RMDs)

The Downside of Delaying RMDs

With the SECURE Act 2.0, Congress is contemplating raising the age for required minimum distributions. However, don't assume you would benefit from th…
September 16, 2021