Retirement Plans
Tax Information
For Retirement Plans
Benjamin Franklin said it best in his letter to Jean-Baptiste Leroy in 1789 when he wrote, “In this world nothing can be said to be certain, and except death and taxes." However, in those final years after a person has worked many hard, long years, is it so wrong for him/her to wish for tax relief and retirement? Living on a fixed income is not an easy feat. Seven states do not impose a state income tax.
They are Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming. In addition, New Hampshire and Tennessee only tax dividends and interest. People planning to retire anywhere else must consider the effect the state’s income tax laws pertaining to retirement and Social Security (SS) benefits will have on their future finances.
Where is Social Security Exempt from Taxes?
There are 27 states (and the District of Columbia) in which Social Security benefits are exempt from income tax. This means taxpayers do not pay any taxes on their SS benefits. Out of the top rated retirement states, Hawaii, Idaho, Arizona, Virginia, and California make the list.
Other states include Alabama, Arkansas, Delaware, Georgia, Illinois, Indiana, Kentucky, Louisiana, Maine, Maryland, Massachusetts, Michigan, Mississippi, New Jersey, New York, North Carolina, Ohio, Oklahoma, Oregon, Pennsylvania, South Carolina, and Wisconsin.
How is Social Security Taxed in the Remaining States?
Certain states of the remaining 14 that have state income taxes base the amount of Social Security benefits taxed on the total income of the person. In Iowa, Connecticut, Missouri, Kansas, and Montana this is the case. In Connecticut, single taxpayers with an adjusted gross income (AGI) over $50,000 (over $60,000 for married couples filing a joint return) have a portion of SS benefits taxed. In Kansas and Iowa, the taxpayer only pays taxes on benefits if his/her AGI is over $75,000. Iowa will join the exempting states in 2014.
In Colorado, Utah, and New Mexico the age of the taxpayer determines the portion of benefits taxed. For instance, taxpayers between 55 and 64 years old are able to exclude $20,000 of their SS benefits. Taxpayers 65 and older are able to exclude $24,000. Taxes apply to any remaining amounts.
In the remaining states, West Virginia, Minnesota, North Dakota, Rhode Island, Nebraska, and Vermont, taxation of SS benefits depends on figures from the Federal tax return. More information on Federal taxation is available at www.irs.gov.
Taxation of other Retirement Benefits
Social Security is not the only retirement benefit most people receive in their golden years. There are Military, Government, and Private Pensions. Those who have served in the armed forces are very important members of the society. States respect the sacrifice they have made, and most states exclude part or all of military pensions from taxation. States with full exemption are Alabama, Hawaii, Illinois, Kentucky, Louisiana, Massachusetts, Michigan, Mississippi, Missouri, New Hampshire, New Jersey, New York, Ohio, Pennsylvania, Tennessee, and Wisconsin.
According to Federal laws, federal civil service pensions must have equal tax treatment to state and local pensions. States do have the right to discriminate against other state’s pensions by creating tax policies. Eleven states exclude all government pensions from taxes – Alabama, Hawaii, Illinois, Kansas, Louisiana, Massachusetts, Michigan, Mississippi, Missouri, New York, and Pennsylvania. In Arizona, Idaho, Kansas, Louisiana, New York, Oklahoma, and the District of Columbia their own pensions receive better tax reliefthan out-of-state plans.
Private pensions do not get very good consideration when it comes to tax relief. Twelve states (and the District of Columbia.) tax these pensions at the maximum allowed rate – Arizona, California, Idaho, Indiana, Kansas, Massachusetts, Minnesota, Nebraska, North Dakota, Rhode Island, Vermont, and West Virginia. Tax relief and retirement certainly do not mesh in these states.
The best states concerning retirement income taxation are Mississippi and Pennsylvania, which exempt all forms including 401(k) and IRA income.
Alabama, Hawaii, and Illinois are great as well, exempting all Social Security benefits and military, government, and some private pensions. The worst states for retirement taxation are Minnesota, Nebraska, Rhode Island, and Vermont. They exclude neither pensions nor other retirement incomes from taxation.
For more information regarding Tax Information for Retirement Plans
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