Some retirees will find themselves keeping much more of their retirement income in their pockets.
People don’t jump for joy when it comes to paying taxes, even though they’re necessary for many of the public services they enjoy daily. This goes for sales, property, capital gains, and income taxes.
Although people spend their whole careers paying taxes and saving for retirement, they’re not off the hook for taxes in retirement. Luckily, 13 states don’t tax retirement income in any form. This doesn’t exempt you from federal tax rules, however, but it can be a major relief and help you keep more money in your pockets in your senior years.
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States with no income tax
Let’s begin with the nine states that don’t tax any income, retirement-related or not:
- Alaska
- Florida
- Nevada
- New Hampshire
- South Dakota
- Tennessee
- Texas
- Washington
- Wyoming
Since these states don’t tax income, they typically make up for it with higher taxes on other sources, such as property, sales, or business taxes. Tennessee, for example, has one of the highest sales taxes in the country.
States that don’t tax some form of retirement income
These six states tax regular income, but retirees are off the hook with some of their retirement income and pensions. Three of them have no tax on retirement income at all:
- Arkansas: Up to $6,000 is exempt annually from individual retirement account (IRA) distributions and employer-sponsored pension plans.
- Illinois: All retirement income is exempt.
- Iowa: After age 55, distributions from retirement accounts and pensions are exempt.
- Mississippi: All retirement income is exempt.
- Pennsylvania: All retirement income is exempt.
- South Carolina: Up to a certain amount is tax-deductible for retirement accounts and pensions.
How Social Security taxes work
There are currently 42 states and Washington, D.C., that don’t tax Social Security benefits. The eight exceptions are Colorado, Connecticut, Minnesota, Montana, New Mexico, Rhode Island, Utah, and Vermont.
Even if you’re in one of the 42 states or D.C., there’s a chance that you’ll need to pay federal taxes on your benefits. How much you pay is based on your combined income, which includes your adjusted gross income (AGI), half of your annual Social Security benefit, and any nontaxable interest you receive.
If you’re single and your combined income is less than $25,000, none of your benefits are eligible to be taxed. If it’s between $25,000 and $34,000, up to 50% are eligible, and if it’s more than $34,000, up to 85%.
If you’re married and filing jointly and your combined income is less than $32,000, none of your benefits are eligible to be taxed. If it’s between $32,000 and $44,000, up to 50% are eligible, and if it’s more than $44,000, up to 85%.
The amount of your Social Security benefits eligible to be taxed is added to your other income and then taxed at your normal income tax rate.
