Which States Do Not Tax Federal Retirement Income: A Comprehensive Guide

Retirement planning involves not only saving and investing but also understanding the tax implications of various retirement benefits. One important consideration is whether or not your state taxes federal retirement income, such as Social Security and federal pensions. This guide will explore the states that do not tax federal retirement income and provide valuable information for retirees and those planning for retirement.

States That Tax Social Security and Federal Pensions

As of 2024, only 13 states tax Social Security benefits, though a few more do not tax federal pension benefits entirely. These states are:

Colorado Connecticut Kansas Minnesota Missouri Montana Nebraska New Mexico North Dakota Rhode Island Utah Vermont West Virginia

These states tax a significant portion of Social Security income due to federal rules. In practice, about 90% of a federal pension is federally taxable, and 85% of Social Security can be taxed at the state level.

States That Do Not Tax Federal Pensions and Social Security

There are several states that do not tax federal pensions or Social Security benefits at all. Here are the states that provide complete relief from taxing federal retirement income:

Alaska Florida Nevada South Dakota Tennessee Texas Washington Wyoming New Hampshire Alabama Illinois Hawaii Mississippi Pennsylvania

For example, as of 2024, Illinois is one of the states that does not tax any Social Security pension or retirement benefits. This significant advantage can significantly impact the financial well-being of retirees residing in these states.

State-Specific Taxation of Federal Retirement Income

Every state's tax laws, rules, and regulations can vary. Here’s a breakdown of the most significant states regarding federal retirement income taxation:

States That Tax Social Security Benefits

These states have specific rules to determine how much of Social Security benefits are taxed, often based on income thresholds. States like Kansas and Missouri, for instance, tax a certain percentage of Social Security benefits based on the retiree's total income.

States That Do Not Tax Federal Pensions and Social Security

These states include:

Alaska Florida Nevada South Dakota Tennessee Texas Washington Wyoming New Hampshire Alabama Illinois Hawaii Mississippi Pennsylvania

Residents of these states can enjoy peace of mind knowing that their federal retirement benefits are not subject to state taxation, which can be a significant benefit in terms of savings and financial security.

Conclusion

Retirement planning should be a well-thought-out process, and understanding the state's tax laws is crucial. By considering whether your state taxes federal retirement income, you can make informed decisions and optimize your retirement income and savings. Whether you're currently a retiree or planning for the future, it's essential to know the specific tax implications in your state to maximize your retirement benefits.