Compare Retirement Taxes vs. Taxes While Working

If you want to save money on taxes in retirement, consider several options. Tax-friendly states are plentiful, and some of the best are not even taxed. Many of the most popular retirement destinations don’t even tax income. This site can calculate your savings if you live in a lower-tax state. This comparison can be beneficial if you plan to move back to your hometown after retirement.

State income tax rates for retirees

If you’re looking for the lowest taxes in the U.S. for retirees, look no further than your state. Luckily, many states don’t tax retirees’ Social Security and pension income. And in many cases, state income tax rates for retirees aren’t even on the radar. Check out the following list of low-tax states:

New York State is the fourth largest state globally, with over half of the population living in or near the greater New York City area. While many other states have similar tax laws, New York’s retirement policies are desirable. Your Social Security benefit will be completely exempt from state income tax, and any income you receive from retirement accounts is tax-deductible up to $20,000 per year. But if you want to avoid paying taxes altogether, you might want to look elsewhere.

Tennessee, for example, will eliminate its Hall tax, which taxes private and government pension income. On the other hand, Oregon taxes most of the income from retirement accounts at the top rate but gives retirees up to $6,250 in credits. While the Hall tax is gone, retirees should look for state income tax rates for retirees, as this information can help them plan for their retirement. So, check out the tax rates in your prospective state and decide what’s best for you.

State income tax rates for pension income

There are many different state income tax rates for pension income. 14 of the fifty states do not tax pension income. Despite this, pension income is taxed in other states. For instance, the state of Florida does not tax Social Security income. However, the District of Columbia does. Ten states tax Social Security, while only five do not tax it. Tennessee also taxes Social Security but only to a limited extent. Fortunately, however, it also has a high sales tax.

States are free to set their tax policies for pension income, though they are not allowed to discriminate against federal civil service pensions. In 1989, the U.S. Supreme Court struck down the Michigan tax policy and declared that states could not determine when taxing pension income from the federal government. In contrast, in the Davis v. Michigan case, the U.S. Supreme Court ruled that states cannot tax federal civil service pensions. The result was substantial conformity between the tax rates for pension income.

While federal law does not prohibit different state tax policies for private and public pensions, some states are more generous with taxing personal pension income than others. In the table below, you can see that some states give less favorable tax treatment to pension income than to Social Security retirement benefits. If you’re a pensioner and plan to retire in another state, you can deduct up to $15,000 from your taxable income if you live in that state.

State income tax rates for Social Security

Some states do not tax Social Security benefits. While many states do not, they do have exemptions for retirement income. For example, New Mexico offers an exemption for retirement income, allowing you to shelter Social Security benefits from state income taxation. Residents in New Mexico also use this tax shelter to shield pension and IRA income. Just because your benefits are subject to federal income tax does not mean they will be taxed in those states. Many states have higher thresholds than the IRS to avoid taxing these benefits.

Taxes on Social Security benefits are higher for those with higher incomes, primarily because of the higher marginal income tax rates. Former Social Security Commissioner Robert M. Ball argued that Social Security should be taxed like other earned benefits. Many workers pay income tax on private pensions up to the total value of benefits and have no income threshold. However, if you make more than this, you will be subject to income tax at the state level.

Most people are unaware that Social Security benefits are not taxed in their home states. Federal income tax rates are much higher than those for other forms of retirement income. Moreover, 85% of your Social Security benefits are never taxed, making them tax-efficient compared to other retirement options. For this reason, 13 states tax Social Security benefits using a federal provisional income formula or their version of it. These income calculations take your adjusted gross income plus tax-exempt bonds interest and add half of your Social Security benefits.