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.
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.