State Personal Income Taxes On Pensions And Retirement Income

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State Personal Income Taxes On Pensions And Retirement Income

Transcript Of State Personal Income Taxes On Pensions And Retirement Income

STATE PERSONAL INCOME TAXES ON PENSIONS AND RETIREMENT INCOME: TAX YEAR 2014
National Conference of State Legislatures Denver, Colorado April 3, 2015
Most states that levy a personal income tax allow people who receive retirement income to exclude part of it from their taxable income. The table that accompanies this introduction provides state-by-state detail. “Retirement income” means income from federal, state and local governments’ retirement plans, Social Security, Railroad Retirement, private pension plans, and deferred compensation plans in the public and private sectors. Retirement income excludes income from current employment, rents and dividends, disability payments and Supplemental Security Income (SSI). This report does not address personal exemptions or deductions that are available to every filer over some specified age, like the federal provision for a larger standard deduction for people who are 65 years old or older.
State policies on retirement income exclusions vary greatly, but have one or both of two purposes: to protect the income of taxpayers who are no longer in the workforce, and to serve as an economic development tool by attracting retired people to, or retaining them in, a state. Such tax provisions seem to have originated years ago as a means of assisting retired public employees who received relatively small pensions. Over the years, many states have made age, not former employment in the public sector, the criterion for retirement income exclusions. The exclusions discussed below generally include an age restriction, which has been omitted from this discussion for the sake of simplicity; however, the age eligibility requirements are specified in the table that follows.
Retirement exclusions and general tax policy States are generally free from federal control in deciding how to tax pensions, but some limits apply. State tax policy cannot discriminate against federal civil service pensions--the U.S. Supreme Court decision in Davis v. Michigan (1989) ended the once common practice of more favorable state tax treatment for state pensions than for federal civil service pensions. In 1992, the U.S. Supreme Court ruled in Barker v. Kansas that states cannot tax U.S. military pensions if they exempt state pensions from taxation. There is no federal impediment to a different state tax policy for public and private pensions, and, as the table indicates, some states provide less favorable tax treatment for private pension income than for public pensions and Social Security retirement benefits.
National Conference of State Legislatures April 2015

Prevalence of retirement income exclusions Of the 50 states, seven–Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming–do not levy a personal income tax. New Hampshire and Tennessee collect income tax only on interest and dividend income. The District of Columbia and 41 states levy a broad-based personal income tax.
Among the 41 states with a broad-based income tax, 36 offer exclusions for some or all specifically identified state or federal pension income or both, a retirement income exclusion, or a tax credit targeted at the elderly. The District of Columbia provides an exclusion for District and federal pension income. The five states that offer none of these are California, Nebraska, North Dakota, Rhode Island and Vermont. Practice regarding Social Security income varies somewhat from these generalizations. Federal law preempts the ability of states to tax income from Railroad Retirement.
Limited retirement income exclusions States take two broad approaches to excluding retirement income from taxation. Some states provide a specific amount of exclusion according to the type of retirement income. For example, Arizona allows the exclusion of $2,500 of state or local government retirement income, federal pension income and military pension income; full exclusion for Social Security income; and no exclusion for private-sector pension income. This model was more prevalent in the past than now. It allowed states to provide a greater exclusion for state and local benefits than for federal civil service benefits, until Davis v Michigan prohibited that in 1989. Attaching income exclusions to retirement income according to its source is now relatively rare among the states (except with reference to private-sector pension or deferred compensation benefits), but it continues to be the practice in Connecticut, the District of Columbia, Idaho, Indiana and New Jersey, as well as Arizona.
The states that offer an exclusion for all state and local government pension income are Alabama, Hawaii, Illinois, Kansas, Louisiana, Massachusetts, Michigan, Mississippi, New York and Pennsylvania. The District of Columbia, Idaho, Iowa, Kentucky, Maine, Missouri, Montana, New Jersey, North Carolina, South Carolina, Oklahoma and West Virginia provide a partial tax exclusion for such income. Consistently with Davis v Michigan, these states’ policies treat federal civil service benefits the same as state and local government retirement benefits. Some of the states apply different policies toward income from out-of-state pensions and toward pensions that originate from the state and its political subdivisions. The table shows where that is the case.
A number of states also provide a retirement income exclusion that taxpayers over a specified age, usually 62 or 65, can apply to non-earned income and, in rare instances, to some earned income. Usually the exclusion is applicable to public sector benefits, Social Security and only some private-sector benefits, but sometimes it is applicable to all income. In a number of states, Social Security is subject to a separate exclusion. Virginia, for example, allows an income exclusion of $12,000 per taxpayer applicable to income from any source for people over 65 (subject to income limitations). In addition, Social Security income is fully exempt. Colorado has a different practice: It allows an exclusion of $24,000 per tax return for filers over 65, regardless of the source of income, and includes Social Security benefits in the base on which the exclusion is determined.
National Conference of State Legislatures April 2015

In addition to those in Colorado and Virginia, exclusions of this sort exist in Arkansas, Delaware, Georgia, Idaho, Iowa, Kentucky, Maine, Maryland, Minnesota, Missouri, Montana, New Jersey, New Mexico, North Carolina, Oklahoma, South Carolina, Utah and West Virginia. The amount of the exclusion varies from $2,000 in West Virginia to $41,110 in Kentucky.
Social Security retirement benefit exclusions Most states exclude Social Security retirement benefits from state income taxes. As the table indicates, the District of Columbia and 27 states with income taxes provide a full exclusion for Social Security benefits–Alabama, Arizona, Arkansas, California, Delaware, Georgia, Hawaii, Idaho, Illinois, Indiana, Iowa, Louisiana, Maine, Maryland, Massachusetts, Michigan, Mississippi, New Jersey, New York, North Carolina, Ohio, Oklahoma, Oregon, Pennsylvania, South Carolina, Virginia and Wisconsin. In addition, Connecticut, Missouri and Kansas provide a full exemption for lower-income taxpayers.
The remaining 14 states with broad-based income taxes tax Social Security to some extent:
 Connecticut, Kansas, Missouri and Montana exempt a portion of Social Security income, or all if the taxpayer meets an earnings test.  Minnesota, Nebraska, North Dakota, Rhode Island, Vermont and West Virginia tax Social Security income to the extent it is federally taxed.  Age-determined income exclusions in Colorado, Minnesota and West Virginia, and the age-determined income tax credit in Utah, can remove
some or all Social Security income from taxation.  Kentucky, New Mexico and Utah require that federally untaxed Social Security benefits be added back to federal adjusted gross income to
calculate the base against which their broad age-determined income exclusions apply.
Full and nearly full pension income exclusions Ten states–Alabama, Hawaii, Illinois, Kansas, Louisiana, Massachusetts, Michigan, Mississippi, New York and Pennsylvania--exclude all federal, state and local pension income from taxation, although some of them restrict the state and local exemption to pensions from within the state. Among these 10 states, only Kansas taxes any Social Security income; in 2007, Kansas provided that persons with an Adjusted gross income (AGI) of less than $75,000 could exclude Social Security income from state taxation by tax year 2008.
These 10 states differ on the taxation of retirement income from private-sector sources. Kansas and Massachusetts do not exclude any privatesector retirement income, but most of the others allow a fairly broad exclusion:
 Pennsylvania allows a full exclusion.  Alabama excludes income from defined benefit plans.  Hawaii excludes income from contributory plans.  Illinois and Mississippi exclude income from qualified retirement plans.  Louisiana, Michigan and New York cap the private-sector exclusion at $6,000, $49,027 and $20,000, respectively (amounts are for taxpayers
filing singly for tax year 2014).
National Conference of State Legislatures April 2015

Sources: The principal sources for this report are instructions for state income tax returns for tax year 2014. Specific state sources are identified in the notes to the table. The other sources consulted have been as follows. Massachusetts Department of Revenue, “Other States’ Tax Treatment of Out-of-State Employee Contributory Government Pensions,” 2015. http://www.mass.gov/dor/individuals/filing-and-payment-information/guide-to-personal-income-tax/massachusetts-income/other-states-taxtreatment-of-out-of-state-employee-co.html Minnesota House of Representatives, House Research Agency, “Taxation of Social Security Benefits,” November, 2014. http://www.house.leg.state.mn.us/hrd/issinfo/sstaxes.aspx Wisconsin Legislative Fiscal Bureau, “Individual Income tax Provisions in the States, Informational Paper 4,” January 2013. http://legis.wisconsin.gov/lfb/publications/InformationalPapers/Documents/2013/4_Individual%20Income%20Tax%20Provisions%20in%20the%20States.pdf
National Conference of State Legislatures April 2015

STATE PERSONAL INCOME TAXES ON RETIREMENT INCOME: TAX YEAR 2014

Notes and sources are listed by states following the table; * indicates a substantive note. Amounts excluded are for tax year 2010 unless otherwise specified. SS = Social Security, RR = Railroad Retirement, which is exempt from state income taxation by federal law.

Exclusions for state and local government pensions apply to pensions from state and out-of-state sources unless otherwise specified.

State AL

State/Local Pension Exclusion Full

Federal Civil Service Pension Exclusion Full

Military Pension Exclusion Full

Social Security Full

Private Pension Exclusion Income from defined benefit plans

AK

No personal income tax.

AZ

AZ plans: $2,500

$2,500

$2,500

Full

AR*

$6,000 per taxpayer $6,000 per taxpayer $6,000 per taxpayer Full

None
$6,000 from qualified traditional IRAs

CA

None

None

None

Full

None

Tax credit of $99 (tax year 2010) for each taxpayer or spouse over 65 years of age.

CO*

65 +, $24,000

65 +, $24,000

65 +, $24,000

65 +, $24,000

65 +, $24,000

55-65, $20,000

55-65, $20,000

55-65, $20,000

55-65, $20,000

55-65, $20,000

Spouses must qualify

individually

CT

None

None

50% exclusion

Full exemption if AGI None

is below $50,000 for

single filers or $60,000

for joint filers.

DE*

60+, $12,500

60+, $12,500

60+, $12,500

Full

60+, $12,500

under 60, $2,000

under 60, $2,000

under 60, $2,000

under 60, $2,000

Amounts are for each Amounts are for each Amounts are for each

Amounts are for each

taxpayer. Married

taxpayer. Married

taxpayer. Married

taxpayer. Married

taxpayers must

taxpayers must

taxpayers must

taxpayers must

individually qualify. individually qualify. individually qualify.

individually qualify.

National Conference of State Legislatures April 2015

STATE PERSONAL INCOME TAXES ON RETIREMENT INCOME: TAX YEAR 2014

Notes and sources are listed by states following the table; * indicates a substantive note. Amounts excluded are for tax year 2010 unless otherwise specified.

SS = Social Security, RR = Railroad Retirement, which is exempt from state income taxation by federal law.

Exclusions for state and local government pensions apply to pensions from state and out-of-state sources unless otherwise specified.

State

State/Local Pension Federal Civil Service Military Pension

Exclusion

Pension Exclusion Exclusion

Social Security

Private Pension Exclusion

DC

62+, $3,000. DC

62+, $3,000

62+, $3,000

Full

None

pensions only.

FL

No personal income tax.

GA

See below

See below

See below

Full

See below

Taxpayers aged 62-64 and over are entitled to a retirement income exclusion of $35,000 per taxpayer ($70,000 joint), of which a maximum of $4,000 per taxpayer may be earned income. The retirement exclusion is $65,000 if the taxpayer is 65 or older. In addition, SS/RR income are also excluded from taxable income.

HI

Full

Full

Full

Full

Full except for partial

taxation of plans to

which employees

contributed.

ID

65+, 62+ if disabled: 65+, 62+ if disabled: Capped at the same Full

None

$31,704 filing

$31,704 filing

exclusion as CSRS

singly/$47,556 filing singly/$47,556 filing benefits.

jointly, (minus SS/RR jointly, (minus SS/RR

benefits) limited to benefits). Applies only

certain public safety to CSRS not to FERS

officers’ benefits.

benefits

Applies to ID

pensions only.

IL

Full

Full

Full

Full

Full for qualified

retirement plans

National Conference of State Legislatures April 2015

STATE PERSONAL INCOME TAXES ON RETIREMENT INCOME: TAX YEAR 2014

Notes and sources are listed by states following the table; * indicates a substantive note. Amounts excluded are for tax year 2010 unless otherwise specified. SS = Social Security, RR = Railroad Retirement, which is exempt from state income taxation by federal law.

Exclusions for state and local government pensions apply to pensions from state and out-of-state sources unless otherwise specified.

State

State/Local Pension Federal Civil Service Military Pension

Exclusion

Pension Exclusion Exclusion

Social Security

Private Pension Exclusion

IN*

None

62+ $2,000 minus

62+ $5,000.

Full

Social Security

Spouses must qualify

income. Spouses must individually

qualify individually.

None

Taxpayers aged 65 or older can take an exemption of $1000 and may be entitled another tax credit of up to $500 (joint returns) depending on income.

IA*

55+ $6,000 individual; 55+ $6,000 individual; 55+ $6,000 individual; Full

55+ $6,000 individual;

$12,000 joint

$12,000 joint

$12,000 joint

$12,000 joint

KS

Full. Applies to KS

Full

Full

Full for AGI of

None

plans only.

$75,000 or less

KY

$41,110 per taxpayer; $41,110 per taxpayer $41,110 per taxpayer Full, although SS

$41,110 per taxpayer;

but benefits from

benefits may limit

Kentucky systems

taxpayer eligibility for

earned before 1/1/98

the exclusions listed in

may be fully excluded.

other categories of

retirement income.

LA

Full for pensions from Full

Full

Full

65+: $6,000 single,

LA state and local

$12,000 joint

governments. Others:

same exclusion as for

private pensions

ME

$10,000 for taxpayer $10,000 for taxpayer $10,000 for taxpayer Full

$10,000 less SS/RR,

plus $10,000 for

plus $10,000 for

plus $10,000 for

but income from

spouse, or survivor of spouse, or survivor of spouse, or survivor of

IRAs, SIMPLE IRA’s

National Conference of State Legislatures April 2015

STATE PERSONAL INCOME TAXES ON RETIREMENT INCOME: TAX YEAR 2014

Notes and sources are listed by states following the table; * indicates a substantive note. Amounts excluded are for tax year 2010 unless otherwise specified.

SS = Social Security, RR = Railroad Retirement, which is exempt from state income taxation by federal law.

Exclusions for state and local government pensions apply to pensions from state and out-of-state sources unless otherwise specified.

State

State/Local Pension Exclusion a pension beneficiary. SS and RR benefits must be deducted from the excluded amount.

Federal Civil Service Pension Exclusion a pension beneficiary. SS and RR benefits must be deducted from the excluded amount.

Military Pension Exclusion a pension beneficiary. SS and RR benefits must be deducted from the excluded amount.

Social Security

Private Pension Exclusion and certain deferred compensation plans is not eligible. Income from governmentsponsored 457(b) plans is eligible after age 55.

MD

See below

See below

See below

Full

See below: not

applicable to IRA,

Roth IRA, SEP or

Keogh plans.

Taxpayers aged 65 and over are entitled to an exemption of $29,000 per person minus SS/RR benefits.

MA

Full for MA pensions; Full

Full

Full

None

out-of-state are

exempt if the state

extends reciprocal

treatment to MA

pensions.

MI

Full for MI pensions; Full

Full

Full

$49,027 single,

capped at the levels

$98,054 joint. Plans

for private pensions

under Sections

for out-of-state

401(k), 457, and

pensions unless MI

403(b) of the IRC are

has a reciprocal

not eligible.

agreement with the

other state not to tax

pensions.

National Conference of State Legislatures April 2015

STATE PERSONAL INCOME TAXES ON RETIREMENT INCOME: TAX YEAR 2014

Notes and sources are listed by states following the table; * indicates a substantive note. Amounts excluded are for tax year 2010 unless otherwise specified.

SS = Social Security, RR = Railroad Retirement, which is exempt from state income taxation by federal law.

Exclusions for state and local government pensions apply to pensions from state and out-of-state sources unless otherwise specified.

State

State/Local Pension Federal Civil Service Military Pension

Exclusion

Pension Exclusion Exclusion

Social Security

Private Pension Exclusion

Persons aged 65 and older or older) may subtract interest, dividends, and capital gains included in AGI. This subtraction is limited to a maximum of $10,929 on a single return or $21,857 on a joint return. However, the maximum must be reduced by the retirement pension subtraction. Persons aged 67 or older can claim deductions of $20,000 (if single) or $40,000 (if joint). Taxpayers who take this deduction cannot claim a pension/retirement deduction.

MN*

None

None

None

SS taxable to extent federally taxed

None

Taxpayers aged 65 and over may be entitled to an exemption of up to $9,000 for single taxpayers and $18,000 married and filing jointly if both spouses are over 65. Income limits apply.

MS

Full

Full

Full

Full

Full for qualified plans

MO*

Age 62+: 100%, capped at $36,442 per spouse: income limits apply. Amount of Social Security exclusion must be deducted from pension exclusion.

Age 62+: 100%, capped at $36,442 per spouse: income limits apply. Amount of Social Security exclusion must be deducted from pension exclusion

75% in 2014. 90% in 2015. Will increase to 100 % beginning Jan. 1, 2016.

100%, income limits apply.

$6,000: income limits apply.

MT* NE

Up to $3,980 for single filers whose AGI is less than $33,200. For joint filers who both have retirement income, up to $7,960. None

Up to $3,980 for single filers whose AGI is less than $33,200. For joint filers who both have retirement income, up to $7,960. None

Up to $3,980 for single filers whose AGI is less than $33,200. For joint filers who both have retirement income, up to $7,960. None. Beginning Tax Year 2015: An individual who retires from the uniform

SS is taxable for taxpayers whose income including SS exceeds $25,000 single, $32,000 joint.
SS taxable to extent federally taxed. Beginning Tax Year 2015: Deduction for

Up to $3,980 for single filers whose AGI is less than $33,200. For joint filers who both have retirement income, up to $7,960. None

National Conference of State Legislatures April 2015

STATE PERSONAL INCOME TAXES ON RETIREMENT INCOME: TAX YEAR 2014

Notes and sources are listed by states following the table; * indicates a substantive note. Amounts excluded are for tax year 2010 unless otherwise specified.

SS = Social Security, RR = Railroad Retirement, which is exempt from state income taxation by federal law.

Exclusions for state and local government pensions apply to pensions from state and out-of-state sources unless otherwise specified.

State

State/Local Pension Exclusion

Federal Civil Service Pension Exclusion

Military Pension Exclusion services on or after July 18, 2012 can make a one-time election to exclude a portion of his or her income received as a military retirement benefit. Election must be made within two years after retirement from the uniformed services.

Social Security
Social Security Income allowed if AGI is less than or equal to $58,000 for married or joint filers or $48,000 for all other returns.

Private Pension Exclusion

NV

No personal income tax.

NH

No personal income tax. Residents over the age of 65 are entitled to exempt $1,200 in income subject to the interest and

dividends tax.

NJ

62+, $20,000 joint; 62+, $20,000 joint; Full

Full

62+, $20,000 joint;

$15,000 single, subject $15,000 single, subject

$15,000 single, subject

to an income ceiling to an income ceiling

to an income ceiling

of $100,000

of $100,000

of $100,000

Taxpayers over the age of 62 are entitled to an additional income exclusion to allow them to reach the amount of the pension exclusion. The sum of the pension exclusion and the additional exclusion may exceed the pension exclusion if the recipient is ineligible to receive Social Security retirement payments.

NM

None

None

None

None

None

Taxpayers aged 65 and older are eligible for an income exemption capped at $8,000 single, $16,000 filing jointly, phased out as AGI grows, and ended at AGI of $51,001 for joint filers, $28,501 for single. People aged 100 or older are fully exempt from income tax unless claimed as a dependent.

National Conference of State Legislatures April 2015
IncomePensionsExclusionRetirement IncomeSecurity