Where You Retire Can Have a Taxing Effect

When contemplating locations for retirement, warm weather and proximity to family are likely top considerations for most soon-to-be retirees. However, calculating the best places to stretch a fixed retirement income should also be top of mind. Understanding the current state tax treatments of retirement benefits can be a key factor in deciding where to establish new, post-career roots.

Taxability of Retirement Benefits Varies State to State

For the 2017 tax year, seven states do not tax individual income – retirement or otherwise – and two other states impose income taxes only on dividends and interest. In the other 41 states and the District of Columbia, tax treatment of retirement benefits varies widely. For example, some states exempt all pension income or all Social Security income. Other states provide only partial exemptions or credits and some tax all retirement income. For full details on the state taxation of retirement income, click here.

Three states exempt pension income entirely for qualified individuals, while 25 states exempt or provide a credit for a portion of pension income. Thirteen states and the District of Columbia tax pension income.

Tax is imposed on Social Security income in 13 states. These states either tax Social Security income to the same extent that the federal government does or provide limited breaks for Social Security income, often for lower-income individuals. See the attached Wolters Kluwer infographic for more information on the state taxation of Social Security income.

Significant State Tax Reforms

Several states have enacted changes in 2017 to their income tax laws for retirement plans. The following chart shows major state tax reforms effective in the 2017 or 2018 tax years:

New State Tax Reforms Effective Beginning
with 2017 Tax Year
New State Tax Reforms Effective Beginning
with 2018 Tax Year
Kansas: Self-employed taxpayers may now claim the federal deduction for pension, profit-sharing, and annuity plans on their Kansas return. Arkansas: Military retirement and survivor benefits are now exempt. However, a taxpayer claiming the exemption may not claim the $6,000 exemption on retirement benefits received from non-military sources.
Maryland: Retired law enforcement, fire and rescue, or emergency services personnel who are at least 55 years old may exclude up to $15,000 of retirement income from taxable income. Connecticut: A complete deduction for retirement income will be phased-in from 2019 to 2025, the income thresholds for the Social Security deduction are increased beginning in 2019, and the increase in the teacher retirement system deduction (25% to 50%) is delayed until 2019. In addition, withholding is now required from pension or annuity distributions to Connecticut residents if the payer maintains an office or transacts business in the state.
Minnesota: A portion of Social Security benefits may be deducted. The maximum deduction is $4,500 for married couples filing joint returns, $3,500 for single and head of household filers, and $2,250 for married couples filing separate returns. Indiana: A $6,250 deduction is available for military retirement and survivor’s benefits. The $5,000 deduction for non-retirement military income, which was previously a combined deduction including military income and military retirement benefits, is retained.
New York: Distributions from a retirement plan may be deductible if used to pay for repairs to a primary residence in certain New York counties because of damage by above average precipitation and snow melt in April and May 2017. Michigan: The deduction for retirement benefits received for services in the U.S. armed forces is expanded to include pension benefits. In addition, an increased deduction for retirement or pension benefits from governmental employment is allowed for taxpayers born after 1945 who retired by 2013.
Utah: Small employers (10 to 19 employees) may claim a $500 tax credit for offering a qualified employee retirement plan.
West Virginia: Military retirement income is exempt from tax.
Wisconsin: Taxpayers over 70½ years of age may now make tax-free distributions from an IRA directly to a charitable organization.

For More Information

To arrange an interview with a federal or state tax expert from Wolters Kluwer Tax & Accounting on this or any other tax-related topic, please contact Nicole Young, 347-931-1055 or Brenda Au, 847-267-2046.