Deciding Where to Retire: Finding a Tax-friendly State to Call Home

Wolters Kluwer Reviews State Tax Treatments of Retirement Benefits

NEW YORK–(BUSINESS WIRE)–While the allure of warmer weather or being close to family are major
factors in selecting a place to retire — so is calculating the best
places to stretch a fixed retirement income. Understanding the current
state tax treatments of retirement benefits can be a key step in
deciding where to establish new, post-career roots.


Taxability of Retirement Benefits Varies State to State

Currently, seven states do not tax individual income – retirement or
otherwise: Alaska, Florida, Nevada, South Dakota, Texas, Washington and
Wyoming. Two other states – New Hampshire and Tennessee – impose income
taxes only on dividends and interest (5 percent flat rate for both
states). 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 exemption or credits and some tax all retirement
income.

States exempting pension income entirely for qualified individuals are
Illinois, Mississippi and Pennsylvania. States that exempt or provide a
credit for a portion of pension income include: Alabama, Arkansas,
Colorado, Delaware, Georgia, Hawaii, Iowa, Kentucky, Louisiana, Maine,
Maryland, Michigan, Missouri, Montana, New Jersey, New Mexico, New York,
Ohio, Oklahoma, Oregon, South Carolina, Utah, Virginia and Wisconsin.
States where pension income is taxed include: Arizona, California,
Connecticut, District of Columbia, Idaho, Indiana, Kansas,
Massachusetts, Minnesota, Nebraska, North Carolina, North Dakota, Rhode
Island, Vermont and West Virginia.

A total of 13 states impose tax on Social Security income: Colorado,
Connecticut, Kansas, Minnesota, Missouri, Montana, Nebraska, New Mexico,
North Dakota, Rhode Island, Utah, Vermont and West Virginia. 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.

Significant State Tax Reforms

States enacting changes to their income tax laws for retirement plans in
2016 include:

  • Minnesota: Military retirement pay (including pensions) is
    deductible. (Change is effective beginning with 2016 tax year.)
  • New Jersey: The gross (personal) income tax exclusion on
    pension and retirement income is increased over a four-year period
    from $20,000 to $100,000 for married taxpayers filing jointly, from
    $15,000 to $75,000 for single and head-of-household filers, and from
    $10,000 to $50,000 for married taxpayers filing separately. (Change
    is effective beginning with the 2017 tax year.)
  • Rhode Island: Taxpayers who have reached the Social Security
    retirement age are eligible for a $15,000 exemption on their
    retirement income. This exemption applies to single taxpayers with
    federal adjusted gross incomes of up to $80,000 and for joint
    taxpayers with federal adjusted gross incomes of up to $100,000 that
    are otherwise qualified (these amounts will be adjusted annually for
    inflation). (Change is effective beginning with 2017 tax year.)
  • South Carolina: A new deduction for military retirement income
    is allowed. For taxpayers under 65 years of age, the deduction is
    $5,900 for the 2016 tax year, but increases by $2,900 each year until
    it is fully phased-in at $17,500 in 2020. For taxpayers 65 years of
    age or older, the deduction is $18,000 for the 2016 tax year, but
    increases by $3,000 each year until it is fully phased-in at $30,000
    in 2020. (Change is effective beginning with 2016 tax year.)

For More Information

For additional detail on the state taxation of retirement benefits and
other tax factors to consider, click here.
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 Laura Gingiss, 847-267-2213 or Brenda Au, 847-267-2046.

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Contacts

Wolters Kluwer Tax & Accounting
Laura Gingiss
847-267-2213
Laura.Gingiss@wolterskluwer.com
or
Brenda
Au
847-267-2046
Brenda.Au@wolterskluwer.com