People generally devote many years to get ready for retirement. Whether through the social security system, investing their savings, or contributing to pension plans, it can be a bit of a chore at times—yet, in the end, that effort often pays off, allowing one to enjoy life’s later years comfortably.
It’s clear that one foolproof method to ease retirement anxiety is financial preparation. However, even after your working days have ended, interacting with the IRS might still be in the cards for you. Federal tax regulations apply universally, but some retirees in certain states could find themselves exempt from various taxes.
States That Don’t Tax Retirement Income
Some states have no taxes on specific retirement incomes, like Social Security, 401(k)/IRA withdrawals, and pensions. Exemptions vary, with some states waiving all taxes while others may only exempt certain types.
- Arkansas: Allows exemption of up to $6,000 annually from IRA distributions until age 59 1/2, as well as pension plans.
- Illinois: Exempts all forms of retirement income, including Social Security and pension withdrawals.
- Iowa: Social Security benefits are exempt; distributions from retirement accounts and pensions are also exempt after turning 55.
- Mississippi: Exempts all retirement income, including Social Security, though early withdrawals may still incur state tax.
- New Hampshire: Exempts Social Security and pension income, though interest and dividends from retirement accounts aren’t exempt but will gradually be phased out.
- Pennsylvania: All retirement income is exempt, including Social Security and pension withdrawals.
- South Carolina: Exempts Social Security; retirement allowances and pensions have a tax deduction limit—$3,000 for those under 65 and $10,000 for those 65 and older.
States With No Income Tax
Generally, withdrawals from Social Security or retirement accounts are taxed like ordinary income. Thus, states without income tax mean these withdrawals aren’t taxed either. Currently, nine states have no income tax:
- Alaska
- Florida
- Nevada
- New Hampshire
- South Dakota
- Tennessee
- Texas
- Washington
- Wyoming
Social Security Tax System
At present, 41 states, along with Washington, D.C., do not impose taxes on Social Security benefits. The nine exceptions planning to implement such taxes are Colorado, Connecticut, Minnesota, Montana, New Mexico, Rhode Island, Utah, Vermont, and West Virginia (which has a full repeal until 2026).
Still, regardless of your state’s approach to taxing Social Security, federal taxes might apply based on your overall income. Essentially, the IRS takes into account your total income for determining the tax on your Social Security benefits.
Your total income encompasses adjusted gross income (AGI), half of your annual Social Security benefits, alongside any tax-free interest you’ve earned. So, for instance, if your AGI is $20,000, and you receive $20,000 from Social Security plus $500 in tax-free interest, your total income would amount to $30,500 ($20,000 plus $10,000 plus $500).
The taxable portion of your Social Security benefits gets added to your regular income and is taxed at the applicable ordinary income tax rate.
