All the States That Do Not Tax Your Pension
Retirement planning often involves considering the financial implications of taxes, especially when it comes to your pension income. For retirees seeking to maximize their income in the golden years, understanding which states don’t tax pension income becomes a crucial factor. Fortunately, there are several states in the United States that offer retirees a tax-friendly haven by exempting pension income from state taxes.
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To provide you with a comprehensive overview, GOBankingRates gathered information from reputable sources, including tax authorities and financial publications. By examining the current tax laws and regulations, we aim to present you with an up-to-date list of states that do not tax your pension income, allowing you to make informed decisions and potentially optimize your retirement finances.
Whether you are approaching retirement or simply considering a change of residence to minimize your tax obligations, understanding the tax implications on pension income can significantly impact your financial future. Here’s where you might want to consider establishing a residence if you receive a pension.
8 States Don’t Tax Pensions Due to No State Income Tax
Alaska
Florida
Nevada
South Dakota
Tennessee
Texas
Washington
Wyoming
5 States Don’t Include Pension Income in State Taxes
Alabama
Illinois
Hawaii
Mississippi
Pennsylvania
1 State Only Taxes Capital Gains
New Hampshire
How do some states not apply taxes to pensions or other retirement income? States have the authority to establish their own tax laws, including determining how retirement income is taxed. For the states that don’t, they usually get the money from other sources. For example, in Nevada, much of it is recouped from tourists and gaming taxes, which broke a record in 2022, according to U.S. News & World Report. And in Texas, the state counters no state income tax with high property taxes and elevated sales taxes, as noted by MoneyWise.
Even if you don’t live in one of these 14 territories, you might still get away with only having a fraction of your pension subject to taxes, according to AARP. Wolters Kluwer, a respected tax publishing company, said that a total of 27 states have a taxation system in place that applies taxes to some but not all retirement or pension income. Generally, these states only tax pension income that exceeds a specific threshold of adjusted gross income.
For instance, in Iowa, joint filers who are 55 years or older can exclude $12,000 from their state taxable income. Similarly, individuals who are older than 55 and file separately can exclude $6,000. Notably, starting from the 2023 tax year, all retirement income will be completely exempt from state income taxes in Iowa.
In some states, the taxation of retirement income is determined based on the taxpayer’s age. For example, South Carolina allows taxpayers aged 65 and older to deduct $10,000 from their public and private retirement income. In Colorado, this deduction is even higher, reaching $24,000.
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Other factors you might want to weigh before uprooting to another state include where there may be above-average property and local taxes, required insurance (as is the case in states like hurricane-prone Florida) and lack of infrastructure for seniors.
It’s worth mentioning that each state may have its own rules and regulations regarding the taxation of retirement income, and these laws can evolve over time. To obtain the most accurate and up-to-date information on how retirement income is taxed in a particular state, it’s advisable to consult tax professionals or refer to the latest resources provided by state tax authorities.
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Selena Fragassi contributed to the reporting for this article.
This article originally appeared on GOBankingRates.com: All the States That Do Not Tax Your Pension
