14 States Don’t Tax Retirement Pension Payouts
14 States That Don' t Tax Pension Payouts
Retirement income from defined benefit plans catches a break in these states
Getty Images Retirement income comes in all forms, and pension payouts are just one of them. To the federal government, most pension payouts are fully taxable as income. To the 50 states and the District of Columbia, the tax picture for pension payouts is a bit more complicated. A patchwork of tax rules
Eight states – Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington and Wyoming – don't tax income at all. A ninth state, New Hampshire, only taxes capital gains and dividend income. And five states – Alabama, Illinois, Hawaii, Mississippi and Pennsylvania – exclude pension income from state taxes. AARP If you don't live in those 14 states, you still may avoid paying taxes on all or some of your pension. According to Wolters Kluwer, a tax publishing company, 27 states tax some, but not all, of . Typically, these states tax pension income only above a certain level of adjusted gross income. For example, Iowa allows joint filers 55 and older to exclude $12,000 from state taxable income. Other filers older than 55 may exclude $6,000. Starting in the 2023 tax year, all retirement income will be exempt from state income taxes. Join today and save 25% off the standard annual rate. Get instant access to discounts, programs, services, and the information you need to benefit every area of your life. A patchwork of retirement income
Pensions pay out a defined amount each month until an employee dies, which is why they are called defined benefit plans. Your payout typically depends on your salary over time, and how long you worked with the company. among private employers, however: Only 14 percent of Fortune 500 companies offered a pension plan to new hires in 2019, down from 59 percent in 1998. Increasingly, Americans have had to rely on defined contribution plans, such as 401(k) plans, for retirement income. The payout from these plans depends on how much you (and often your employer) contribute, as well as the investment returns in the plan. In most defined contribution plans, distributions are taxed as ordinary income by the federal government, but taxation varies from state to state. Of the 14 states that won't tax your pension, two states – Alabama and Hawaii – will tax your income from defined contribution plans such as 401(k)s. Finally, there's Social Security income. The , depending on your income. You'll be taxed on: up to 50 percent of your benefits if your income is $25,000 to $34,000 for an individual or $32,000 to $44,000 for a married couple filing jointly. up to 85 percent of your benefits if your income is more than $34,000 (individual) or $44,000 (couple). And 12 states — Colorado, Connecticut, Kansas, Minnesota, Missouri, Montana, Nebraska, New Mexico, Rhode Island, Utah, Vermont and West Virginia — can tax all or part of your Social Security benefits. Taxes aren t everything
States need money to pay for roads, services and education, and if they don't tax retirement benefits, they will find the money elsewhere — typically in property or sales taxes. And there are , too. The Tax Foundation, a nonpartisan think tank, rates Alaska as one of the most tax-friendly states to live in. Your decision to move to Alaska should also take into account your fondness for cold winters and bears. John Waggoner covers all things financial for AARP, from budgeting and taxes to retirement planning and Social Security. Previously he was a reporter for Kiplinger's Personal Finance and USA Today and has written books on investing and the 2008 financial crisis. Waggoner's USA Today investing column ran in dozens of newspapers for 25 years. Also of Interest
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