Many states recognize federal retirees’ public service by exempting federal government pensions from taxes or treating them more favorably than other forms of income, such as private pensions, reports Kiplinger in “States That Tax Your Federal Government Pension the Most.”
When you look at a retirement destination, you might consider avoiding states that tax federal government pensions. It could save a federal retiree many thousands of dollars in state taxes every year throughout retirement.
There are some states that will tax all pension income, such as California, Connecticut, Nebraska, North Dakota and Vermont—as well as the District of Columbia. All of these states, except North Dakota, make Kiplinger’s list of “Least Tax-Friendly States for Retirees.”
Wisconsin is also tough on retiree taxes, but does make exceptions for the commissioned corps of the National Oceanic and Atmospheric Administration (NOAA) and the Public Health Service (such as the Surgeon General). Their pensions are exempt along with those of military veterans.
Those collecting federal pensions need to consider four other states: Arizona, Montana, Ohio, and Utah. Like many states, these four states exempt some retirement income from taxation, including income from federal sources. But the difference is that their exemptions are quite limited compared with the average.
For example, in Montana, only $4,110 of income can be exempt, and the retiree’s adjusted federal gross income (AGI) must be less than $34,260 to qualify.
In Arizona, the exemption is even lower at $2,500, but it’s not limited by income.
Ohio offers a tax credit. However, the most you can deduct is $250. Utah is a tax-credit state. Their maximum credit is $450. Ohio and Utah limit this credit based on income.
Military pensions and railroad retirement benefits also get some special exemptions—even in states that aren’t too generous with traditional federal pensions and other forms of income.
Speak with an estate planning attorney about how your state taxes different forms of retirement income.
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Reference: Kiplinger (May 16, 2017) “States That Tax Your Federal Government Pension the Most”