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Where Income Is Not Taxed
A state that has no income tax helps you stretch your nest egg. As a retiree on a pension, you have seven states from which to choose: Wyoming, Washington, Texas, South Dakota, Nevada, Florida and Alaska. New Hampshire and Tennessee levy income taxes only on dividends and interest. None of these states taxes Social Security income, making them even more attractive retirement residences.
Tax-Free Pension Havens
Residents of Mississippi, Illinois and Pennsylvania pay a state income tax, but not on their pension income. Retirement income exemptions in all three states include employer-sponsored benefit plans such as 401(k), IRAs and thrift plans, military and other government pensions, and deferred compensation programs.
Pension Exemption States
Several states give retirees a break by taxing only a portion of their pension income. Tennessee residents 65 and older pay no tax on annual income of $33,000 if single or $59,000 if married filing
jointly. Kentucky exempts annual retirement income up to $41,111. Georgia has the highest exclusions -- $65,000 for single filers and $130,000 for couples – while New Hampshire has the smallest -- $1,200.
No-Tax States for Government Pensions
The type of pension you have determines if a state taxes it. Eight states with income tax do not make retired military personnel pay it on their pensions: Alabama, Kansas, Massachusetts, New Jersey, Hawaii, Wisconsin, Louisiana and Michigan. Arizona and Hawaii don't tax state or local government pensions. Kansas doesn't tax its retired Kansas state or municipal workers' pensions, but it does tax pensions from other states. Alabama excludes income from defined benefit plans or pensions paid fully by the employer and based on years of service and salary. Massachusetts excludes state and government pensions from its income tax if the state involved doesn't tax the pensions of Massachusetts state retirees.