Your pension income is not taxed in a number of U.S. states, offering significant financial advantages for retirees. These states either do not levy a general income tax, or they specifically exempt pension distributions from taxation. Understanding these state-specific rules can be crucial for retirement planning.
States That Do Not Tax Pension Income
There are seventeen states where your pension income is not subject to state-level taxation. These states are:
- Alabama
- Alaska
- Florida
- Hawaii
- Illinois
- Iowa
- Mississippi
- Nevada
- New Hampshire
- Pennsylvania
- Rhode Island
- South Dakota
- Tennessee
- Texas
- Vermont
- Washington
- Wyoming
Detailed Overview of States Exempting Pension Income
To provide a clearer picture, these states can generally be categorized based on their overall income tax policies:
| State | General Income Tax Policy | Pension Tax Status |
|---|---|---|
| Alabama | Has income tax, but pensions are exempt | Not Taxed |
| Alaska | No state income tax | Not Taxed |
| Florida | No state income tax | Not Taxed |
| Hawaii | Has income tax, but pensions are largely exempt | Not Taxed |
| Illinois | Has income tax, but pensions are exempt | Not Taxed |
| Iowa | Has income tax, but pensions are exempt | Not Taxed |
| Mississippi | Has income tax, but pensions are exempt | Not Taxed |
| Nevada | No state income tax | Not Taxed |
| New Hampshire | Taxes interest & dividends, but not wages/pensions | Not Taxed |
| Pennsylvania | Has income tax, but pensions are exempt | Not Taxed |
| Rhode Island | Has income tax, but some pensions are exempt | Not Taxed |
| South Dakota | No state income tax | Not Taxed |
| Tennessee | Taxes interest & dividends, but not wages/pensions | Not Taxed |
| Texas | No state income tax | Not Taxed |
| Vermont | Has income tax, but some pensions are exempt | Not Taxed |
| Washington | No state income tax (though a capital gains tax exists) | Not Taxed |
| Wyoming | No state income tax | Not Taxed |
Key Insights for Retirement Planning
When considering states with no pension tax, it's helpful to understand the underlying tax structure:
- No State Income Tax: A significant number of these states do not impose a general state income tax at all. This means not only pension income, but also wages and other forms of income, are typically exempt from state taxation. States in this category include: Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming.
- Income Tax on Interest & Dividends Only: Some states have a very limited income tax, primarily on interest and dividends, but do not tax pension income or wages. New Hampshire and Tennessee fall into this unique category.
- Specific Pension Exemptions: Other states do have a broader state income tax, but they specifically exempt qualified pension and retirement income from taxation. This group includes: Alabama, Hawaii, Illinois, Iowa, Mississippi, Pennsylvania, Rhode Island, and Vermont. It's worth noting that exemptions can sometimes depend on the type of pension, the retiree's age, or income level, so verifying specific state regulations is always wise.
Always remember that state tax laws can change, and it's advisable to consult with a qualified financial advisor or tax professional for personalized guidance based on your specific circumstances.
