retirement

States That Tax Your Federal Government Pension the Most

Retired federal employees often get a tax break for their service. But not here.

Many states recognize federal retirees’ public service by specifically exempting federal government pensions from taxation or treating them more favorably than other forms of income, including private pensions.

When evaluating retirement destinations, avoiding the states that do tax federal government pensions could save a federal retiree thousands of dollars in state taxes every year throughout retirement.

Of course, beware the states that take aim at all pension income. Those are California, Connecticut, Nebraska, North Dakota and Vermont — as well as the District of Columbia. (All these states except North Dakota are on our list of the Least Tax-Friendly States for Retirees.) The same goes for Wisconsin, which does make notable exceptions for the commissioned corps of the National Oceanic and Atmospheric Administration and the Public Health Service (the Surgeon General is an example of this cadre). Their pensions are exempt along with those of their military brethren.

But people collecting pensions from Uncle Sam need to look askance at four other states: Arizona, Montana, Ohio and Utah. Like many states, these exempt some retirement income — including income from federal sources — from taxation. The difference is that their exemptions are quite scanty compared with the average.

In Montana, only $4,110 of income can be exempt, and your adjusted federal gross income must be less than $34,260 to even qualify. Arizona’s exemption is even lower ($2,500), but it’s not limited by income. Ohio offers a tax credit (a credit is usually more powerful than an exemption because it lowers your taxes dollar for dollar), but the most you can knock off is $250. Utah is also a tax-credit state, with a maximum credit of $450. Both Ohio and Utah limit this credit based on income.

(Note: Military pensions and Railroad Retirement Benefits enjoy special exemptions, even in many states that are not so generous with traditional federal pensions and other forms of income.)

To find out more about how states tax different forms of retirement income, see our Retiree Tax Map and our list of the 10 Most Tax-Friendly States for Retirement — where you won't find a single one of these locations looking to take a bite out of your federal pension.

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