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CCH can assist you with stories, including interviews with CCH subject experts. Also, the 2007
CCH Whole Ball of Tax is available in print. Please contact:

Leslie Bonacum
(847) 267-7153
mediahelp@cch.com

Neil Allen
(847) 267-2179
neil.allen@wolterskluwer.com

Link to special CCH Tax Briefings on key topics from 2006:

2007 CCH Whole Ball of Tax

Release (11) | Back to WBOT

2007 CCH Whole Ball of Tax

Contact: Leslie Bonacum, 847-267-7153, mediahelp@cch.com
Neil Allen, 847-267-2179, neil.allen@wolterskluwer.com

The State of Retirement: When It Comes to Taxes, Which States Are Most Friendly to Retirees?

(RIVERWOODS, ILL., January 2007) – Whether you’re looking to stay put, seeking out adventure or just hoping for a warmer climate in your golden years, how much of your retirement income goes to taxes depends not just on how much income your nest egg earns, but also on where you choose to live, according to CCH, a Wolters Kluwer business and a leading provider of tax, accounting and pension law information, software and services (CCHGroup.com).

“Understanding the intricacies of state tax law isn’t easy, but individuals should take into consideration the impact that state taxes will have on their retirement income. It may be enough to make some individuals consider moving and others realize that their best option may be to stay put,” said CCH State Tax Analyst John Logan, JD.

Retirement Income

Tax treatment of retirement income is almost unique to every state. For example, some states exempt pension income entirely from state income, like Pennsylvania, while others exempt a portion of pension income up to a certain level, like Arkansas, and others add an age restriction. For example, in Georgia, you must be 62 or older to exclude a portion of your retirement income from state tax. Some states also provide special tax breaks for income from other types of retirement vehicles. For example, Illinois allows not just income from federally qualified retirement plans to be excluded, but also certain IRA distributions and retirement payments to a retired partner.

A number of states, such as California, do not allow any exemptions for pension and other retirement income that is included in an individual’s federal adjusted gross income, while other states only exempt government or military pensions, but not private pensions.

Certain states don’t tax Social Security income, including New Jersey, while others place a limit on how much Social Security income is taxable.

In addition to the nine states that do not have a broad-based individual income tax, 26 states and the District of Columbia do not tax Social Security income. The other states either tax Social Security income to the same extent that the federal government does, or provide breaks for Social Security income, oftentimes for lower-income individuals. For example, Connecticut allows joint filers with a federal AGI below $60,000 to deduct from federal AGI all Social Security income included for federal income tax purposes. Wisconsin, which currently offers a partial exclusion of no more than 50 percent of Social Security income, will be allowing a full exclusion starting in 2008.

For an overview of states that offer special treatment for pension and Social Security income, see the chart at the end of this release.

“If you think you should qualify for an income tax break, speak to a tax advisor. It’s also wise to speak to your tax advisor if you’re considering relocating to another area as he or she can investigate the tax consequences of a move particular to your situation,” said Logan.

State Income Tax Rates

If you live in one of the seven states that do not tax individual income, your sources of retirement income are safe from state tax. These states are: Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming. New Hampshire and Tennessee impose income taxes only on dividends and interest (5 percent for New Hampshire and 6 percent for Tennessee for 2006). Though you won’t be subject to a state income tax, you will have to keep in mind many of the other state-levied taxes such as property and sales tax noted below that also can chip away at retirement income.

For those living in one of the remaining 41 states, it’s great if your state offers preferential tax treatment for a retiree’s pension income, but it’s also important to understand what the state income tax rate will be for income that will be taxed.

Those states with among the highest maximum income taxes include California (with a maximum marginal state income tax rate of 9.3 percent for 2006), Oregon (9 percent), Iowa (8.98 percent), New Jersey (8.97 percent), District of Columbia (8.7 percent), Maine (8.5 percent), Hawaii (8.25 percent) and North Carolina (8.25 percent). But even this isn’t all that clear cut. For example, California imposes an additional 1 percent tax on taxable income in excess of $1 million, and, while Massachusetts has a short-term capital gains state tax rate of 12 percent, all remaining income is taxed at 5.3 percent.

Other Tax Considerations for Retirees

In addition to taxes on income, the taxes on general living expenses, as well as the taxes on your home, can quickly add up for retirees.

Sales Tax

Seniors should consider how much of their savings will go to pay for sales tax. Alaska, Delaware, Montana, New Hampshire and Oregon have no state sales tax, and Colorado’s is just 2.9 percent for 2006. Those with the highest sales tax include: Mississippi, New Jersey, Rhode Island and Tennessee, each with a 7-percent sales tax; while Minnesota, Nevada and Washington have a 6.5-percent sales tax; and California, Illinois and Texas assess a 6.25- percent sales tax.

In addition to the state tax, retirees also should look at how much sales tax is assessed by the local municipalities, which can further add to expenses. While municipalities in most states assess their own sales tax on top of the state sales tax, 14 states have only a single rate. These are Connecticut, Hawaii, Indiana, Kentucky, Maine, Maryland, Massachusetts, Michigan, Mississippi, New Jersey, Rhode Island, Vermont, Virginia and West Virginia.

Property Taxes

Property taxes also are a major tax consideration, especially for individuals on a fixed income. This has been particularly acute over the last few years with homes appreciating significantly, and property tax assessments rising lock-step. These rates vary greatly state to state and municipality to municipality. So it is wise to take a look not only at your existing property tax rates, but also how property tax rates have changed over the years. If you’re moving into an “up-and-coming” area versus one that is more mature, or you are moving into an area that is re-gentrifying, you may find your property taxes increasing at a higher-than-anticipated rate.

Logan also advises seniors to understand the different tax implications for different tax areas if you are considering a move and, whether staying where you now live or moving, seeing if your state or local county or municipality offers any property tax breaks for older residents.

“Most states and municipalities offer some type of tax break to seniors,” said Logan. “Check with your local property assessor to see if you qualify for any of the help available.”

Sharing the Wealth: A State’s Estate Tax and Inheritance Tax

For most people – except perhaps the very well off, or overly generous – how you will be taxed when you’re alive will be of far greater concern to you than how much the state plans to tax your estate when you die.

On the federal level, thanks to the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA), the estate tax rate is on a steady decline through 2009, and for 2010 there is no federal estate tax. But, should you die in 2011, the estate tax will revert to pre-EGTRRA law, meaning your estate’s federal tax will be 55 percent of the excess over $3 million (effectively, 60 percent for estates in excess of $10 million but less than $17,184,000).

Traditionally, the states have followed federal law when it comes to the estate tax, but, post-EGTRRA, 17 states and the District of Columbia have retained their estate taxes. These states are Illinois, Kansas, Maine, Maryland, Massachusetts, Minnesota, Nebraska, New Jersey, New York, North Carolina, Oklahoma, Oregon, Rhode Island, Vermont, Virginia, Washington, Wisconsin and the District of Columbia. In addition, Connecticut imposes a uniform tax on gifts and estates.

“Many states felt they needed this tax revenue, as a tax revenue loss here would have resulted in the need to raise taxes somewhere else,” said Logan.

Eight states also collect an inheritance tax, which is solely a state tax assessed on the portion of an estate received by an individual (versus an estate tax which is a tax that is assessed on the entire estate before it is distributed to individual parties). These states are: Indiana, Iowa, Kentucky, Maryland, Nebraska, New Jersey, Pennsylvania and Tennessee. Connecticut’s “succession” tax will be fully phased out for all heirs in 2008, but is being replaced with a transfer tax on Connecticut taxable gifts and estates that exceed a combined lifetime total of $2 million. Assets transferred to a spouse are exempt from the tax, and some states also exempt assets transferred to children and close relatives.

About CCH, a Wolters Kluwer business

CCH, a Wolters Kluwer business (CCHGroup.com) is a leading provider of tax and accounting law information, software and services. It has served tax, accounting and business professionals and their clients since 1913. Among its market-leading products are The ProSystem fx® Office, CCH® Tax Research NetWork™, Accounting Research Manager® and the U.S. Master Tax Guide®. CCH is based in Riverwoods, Ill.

Wolters Kluwer is a leading global information services and publishing company. The company provides products and services for professionals in the health, tax, accounting, corporate, financial services, legal and regulatory, and education sectors. Wolters Kluwer has annual revenues (2005) of €3.4 billion, employs approximately 18,400 people worldwide and maintains operations across Europe, North America, and Asia Pacific. Wolters Kluwer is headquartered in Amsterdam, the Netherlands. Its shares are quoted on the Euronext Amsterdam (WKL) and are included in the AEX and Euronext 100 indices. For more information, visit www.wolterskluwer.com.

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State Taxation of Retirement Income

The following shows, generally, which states tax retirement income, including Social Security and Pension income. States shaded indicate they do not tax Social Security or Pension income.

State	State Tax of Social Security Income	State Tax of Pension Income
Alabama	Not taxed	Certain pension income not taxed
Alaska	No individual income tax	No individual income tax
Arizona	Not taxed	Generally taxable
Arkansas	Not taxed	Exempt to certain level
California	Not taxed	Generally taxable
Colorado	Exempt to a certain level	Exempt to a certain level; age restrictions apply
Connecticut	Exemption based on adjusted gross income (AGI)	Generally taxable
Delaware	Not taxed	Exempt to a certain level; age restrictions apply
District of Columbia	Not taxed	Generally taxable
Florida	No individual income tax	No individual income tax
Georgia	Not taxed	Exempt to a certain level; age restrictions apply
Hawaii	Not taxed	Distributions are exempt
Idaho	Not taxed	Generally taxable
Illinois	Not taxed	All income from federally qualified pension plan is exempt
Indiana	Not taxed	Generally taxable
Iowa	Exempt to a certain level	Exempt to a certain level; age restrictions apply
Kansas	Taxed	Generally taxable
Kentucky	Not taxed	Exempt to a certain level
Louisiana	Not taxed	Exempt to a certain level; age restrictions apply
Maine	Not taxed	Exempt to a certain level
Maryland	Not taxed	Exempt to a certain level; age restrictions apply
Massachusetts	Not taxed	Generally taxable
Michigan	Not taxed	Exempt to a certain level
Minnesota	Taxed	Generally taxable
Mississippi	Exempt in total	Not taxed

Missouri	Exemption based on AGI	Exempt to a certain level; income restrictions apply
Montana	Exemption based on AGI	Exempt to a certain level; income restrictions apply
Nebraska	Taxed	Generally taxable
Nevada	No individual income tax	No individual income tax
New Hampshire	Only dividends and interest are taxable	Only dividends and interest are taxable
New Jersey	Social Security excluded from gross income	Exempt to a certain level; age and income restrictions apply
New Mexico	Taxed	Exempt to a certain level; age and income restrictions apply
New York	Not taxed	Exempt to a certain level; age restrictions apply
North Carolina	Not taxed	Exempt to a certain level
North Dakota	Taxed	Generally taxable
Ohio	Not taxed	Credit for pension distribution or income allowed; age restrictions apply
Oklahoma	Not taxed	Exempt to a certain level; age restrictions apply
Oregon	Not taxed	Credit for pension distribution or income allowed; age restrictions apply
Pennsylvania	Not taxed	Not taxed
Rhode Island	Taxed	Generally taxable
South Carolina	Not taxed	Exempt to a certain level; age restrictions apply
South Dakota	No individual income tax	No individual income tax
Tennessee	Only dividends and interest are taxable	Only dividends and interest are taxable
Texas	No individual income tax	No individual income tax
Utah	Exemption based on AGI	Exempt to a certain level; age and income restrictions apply
Vermont	Taxed	Generally taxable
Virginia	Not taxed	Exempt to a certain level; age and income restrictions apply
Washington	No individual income tax	No individual income tax
West Virginia	Taxed	Generally taxable, but special age-restricted limited deduction available
Wisconsin	Exempt to a certain level	Generally taxable
Wyoming	No individual income tax	No individual income tax

State Tax Treatment of Social Security and Pension Income

The following CCH analysis provides a general overview of how the states treat income from Social Security and Pensions. States shaded indicate they do not tax Social Security or Pension income.

State	Social Security Income	Pension Income
Alabama	State computation not based on federal. Social Security benefits excluded from taxable income.	Individual taxpayer’s pension income from retirement pay or an IRC Sec. 414(j) defined benefit plan is not taxed.
Alaska	No individual income tax.	No individual income tax.
Arizona	Social Security benefits subtracted from federal adjusted gross income (AGI).	Individual taxpayer’s pension income is generally taxable.
Arkansas	State computation not based on federal. Social Security benefits excluded from taxable income.	Up to $6,000 total in retirement pay benefits and benefits received from an individual retirement account (IRA) is exempt.
California	Social Security benefits subtracted from federal AGI.	Individual taxpayer’s pension income is generally taxable.
Colorado	Pension income, including Social Security benefits, up to $24,000 may be subtracted from federal taxable income by those 65 and older, and up to $20,000 by those 55 and older or those who are second party beneficiaries of someone 55 or older.	An individual taxpayer age 55 through 64 years can exclude up to $20,000 ($24,000 for a taxpayer age 65 or older) in pension and annuity income.
Connecticut	Joint filers and heads of households with AGIs under $60,000 and individuals with AGIs under $50,000 deduct from federal AGI all Social Security income included for federal income tax purposes. Joint filers and heads of households with AGIs over $60,000 and individuals with AGIs over $50,000 deduct the difference between the amount of Social Security benefits included for federal income tax purposes and the lesser of 25% of Social Security benefits received or 25% of the excess of the taxpayer's provisional income in excess of the specified base amount under IRC Sec. 86(b)(1).	Individual taxpayer’s pension income is generally taxable.

Delaware	Social Security benefits subtracted from federal AGI.	An individual taxpayer under the age of 60 may deduct pension amounts of up to $2,000, and a taxpayer age 60 or older may deduct up to $12,500. Eligible amounts for a taxpayer age 60 or older include retirement income (that is, dividends, capital gains realization, interest and rental income).
District of Columbia	Social Security benefits subtracted from federal AGI.	Individual taxpayer’s pension income is generally taxable.
Florida	No individual income tax.	No individual income tax.
Georgia	Social Security benefits subtracted from federal AGI.	For 2006, an individual taxpayer age 62 or older may exclude up to $25,000 (in 2007, $30,000; after 2007, $35,000) of retirement income (but earned income is limited to $4,000).
Hawaii	Social Security benefits subtracted from federal AGI.	Distributions derived from employer contributions to pensions and profit-sharing plans are exempt.
Idaho	Social Security benefits subtracted from federal AGI.	Individual taxpayer’s pension income is generally taxable.
Illinois	Social Security benefits subtracted from federal AGI.	Income from a federally qualified retirement plan, and an IRA, as well as retirement payments to a retired partner, is excluded.
Indiana	Social Security benefits subtracted from federal AGI.	Individual taxpayer’s pension income is generally taxable.
Iowa	No more than 50% of Social Security benefits taxable. Subtraction allowed for 32% of taxable benefits for tax years 2007 and 2008; 43% in 2009; 55% in 2010; 67% in 2011; 77% in 2012, and 89% in 2013. For tax years after 2013, Social Security benefits are fully exempt.	Married taxpayers age 55 or older filing a joint return may exclude up to $12,000 ($6,000 for an unmarried taxpayer) of pension benefits and other retirement pay. A special rule applies to a spouse filing separately.
Kansas	State computation begins with federal AGI. No subtraction.	Individual taxpayer’s pension income is generally taxable.
Kentucky	Social Security benefits subtracted from federal AGI.	After 2005, $41,110 of retirement income from a pension plan, annuity contract, profit-sharing plan, retirement plan, or employee savings plan, including IRA amounts and other similar income, is exempt.

Louisiana

Social Security benefits subtracted from federal AGI.

Up to $6,000 of the pension and annuity income of an individual taxpayer age 65 or older is exempt.

Note for tax years 2002, 2003 and 2004, the Louisiana Dept. of Revenue must accept an amended state personal income tax return from a couple filing a joint return where both spouses are age 65 or older and only one spouse had retirement income. Specifically, during 2006, the Department must accept an amended return for 2002; during 2007, the Department must accept an amended return for 2003; and, during 2008, the Department must accept an amended return for 2004.

State law had provided that a married couple filing a joint return, where both spouses were 65 or older, were entitled to treat as exempt from Louisiana income tax up to $12,000 of retirement income, regardless of whether one or both spouses were receiving retirement income. However, in 2002, without notice, the Department modified the state’s personal income tax return to allow a married couple where both were 65 or older to exempt the full $12,000 of retirement income only if both spouses were receiving retirement income. The revised return allowed a reduced $6,000 exemption when only one spouse was receiving retirement income. Relief from that departmental decision has now been provided.

Maine	Social Security benefits subtracted from federal AGI.	A recipient of pension benefits under an employee retirement plan may generally subtract from federal AGI the lesser of: – $6,000 (reduced by the total amount of the recipient’s Social Security benefits and Railroad Retirement benefits paid); or – the aggregate of pension benefits received by the recipient under employee retirement plans and included in the individual’s federal AGI.
Maryland	Social Security benefits subtracted from federal AGI.	For 2006, up to $22,600, generally, in pension income (except income from an IRA, SEP or Keogh) is excludable for an individual taxpayer age 65 or older.
Massachusetts	Social Security benefits subtracted from federal AGI.	Individual taxpayer’s pension income is generally taxable.
Michigan	Social Security benefits subtracted from federal AGI.	For 2006,up to $40,920 in pension and retirement income is deductible on a single return ($81,840 on a joint return).
Minnesota	State computation begins with federal taxable income. No subtraction.	Individual taxpayer’s pension income is generally taxable.
Mississippi	State computation not based on federal. Social Security benefits exempt in total.	Retirement allowances, pensions, annuities, or “optional retirement allowances” (that is, income from a Keogh plan, an IRA or a deferred compensation plan) are exempt.

Missouri

State computation begins with federal AGI. Up to $6,000 of retirement income, including Social Security benefits is exempt, if annual income less taxable Social Security benefits is $25,000 or less ($32,000 for married taxpayers filing jointly).

An individual taxpayer may deduct from his or her state AGI up to $6,000 from a qualified annuity, pension, Keogh plan, IRA, IRC Sec. 401(k) plan and/or deferred compensation plan.

The deduction is applicable only to the extent that such amounts were included in the taxpayer’s federal AGI and not otherwise deducted.

To qualify for the full $6,000 subtraction, a taxpayer’s state AGI must not exceed:

– $32,000, if married filing jointly;

– $16,000, if married filing separately; or

– $25,000 for any other filing status.

For a taxpayer with an income level above the AGI limits listed above, the $6,000 exemption is reduced by one dollar for each dollar of income over the limit.

For the purpose of establishing these AGI limits, Social Security benefits are excluded from state taxable income.

Montana

Separate calculation to determine taxable Social Security benefits. Benefits exempt if income is $16,000 or under for single filers, $25,000 or under for heads of households, or $32,000 and under for married taxpayers filing jointly.

For an individual taxpayer, up to $3,600 of pension and annuity income is exempt (reduced by two dollars for every one dollar of federal AGI that exceeds $30,000). A disabled retiree may be able to exclude such income up to $5,200.

Nebraska

State computation begins with federal AGI. No subtraction.

Individual taxpayer’s pension income is generally taxable.

Nevada	No individual income tax.	No individual income tax.
New Hampshire	Only dividends and interest are taxable.	Only dividends and interest are taxable.
New Jersey	State computation not based on federal. All Social Security benefits are excluded by statute from gross income.	Married taxpayers filing jointly and age 62 or older with an income of $100,000 or less may exclude up to $20,000 of pension or annuity income, or of IRA withdrawals ($10,000 if an individual taxpayer is married and filing separately, or $15,000 for a single taxpayer, a head of household, or a qualifying widow(er)).
New Mexico	State computation begins with federal AGI. No subtraction.	An individual taxpayer age 65 or older may exempt up to $8,000 of income, including pension income, depending upon the individual's filing status and federal AGI. Joint filers, a surviving spouse or a head of household with an AGI of $51,000 or more are ineligible for this exemption. A married individual filing separately becomes ineligible at $25,500. A single individual becomes ineligible at $28,500.
New York	Security benefits subtracted from federal AGI.	For an individual taxpayer age 59 1/2 or older, $20,000 of pension and annuity income is exempt.

North Carolina	Social Security benefits subtracted from federal taxable income.	Up to $2,000 in retirement benefits, other than railroad retirement benefits, received during the tax year from one or more private retirement plans, and included in federal gross income, is deductible. For a married couple filing a joint return, the maximum amount that may be deducted applies separately to the benefits received by each spouse.
North Dakota	State computation begins with federal taxable income. No subtraction.	Individual taxpayer’s pension income is generally taxable.
Ohio	Social Security benefits subtracted from federal AGI.	An individual taxpayer age 65 or older may claim a credit for a lump-sum distribution from a retirement, pension or profit-sharing plan equaling $50 multiplied by the taxpayer’s expected remaining life years. Also, a recipient of retirement income may claim a credit ranging from $25 to $200, depending on the amount of benefit received during the year.
Oklahoma	Social Security benefits subtracted from federal AGI.	For 2006, $10,000 of retirement benefits from a private pension is exempt for an individual taxpayer age 65 or older with an AGI of $37,500 or less for a single taxpayer, a head of household, or a married taxpayer filing separately ($75,000 or less for married taxpayers filing jointly or a qualifying widow(er)).
Oregon	Social Security benefits subtracted from federal taxable income.	An individual taxpayer age 62 or older may claim a credit for pension income from a public or qualified private pension benefit plan in the amount of the lesser of 9% of the individual’s net pension income or the individual’s state personal income tax liability.

Pennsylvania	State computation not based on federal. Social Security benefits not included in state taxable income.	Individual taxpayer’s pension income is not taxed.
Rhode Island	State computation begins with federal taxable income. No subtraction.	Individual taxpayer’s pension income is generally taxable.
South Carolina	Social Security benefits subtracted from federal taxable income.	An individual taxpayer receiving retirement income may deduct up to $3,000. A taxpayer age 65 or older may deduct up to $10,000. Note that the personal income tax deduction from taxable retirement income may be claimed only by the taxpayer who is the original owner of a qualified retirement account.
South Dakota	No individual income tax.	No individual income tax.
Tennessee	Only dividends and interest are taxable.	Only dividends and interest are taxable.
Texas	No individual income tax.	No individual income tax.
Utah	State computation begins with federal taxable income. No subtraction, except Social Security income eligible for inclusion in retirement income deduction for taxpayers under age 65 of up to $4,800 and retirement income exemption for taxpayers age 65 and older of up to $7,500. Deduction and exemption reduced by 50¢ of each dollar of income exceeding $32,000 for married taxpayers filing jointly, $16,000 for married taxpayers filing separately, and $25,000 for single taxpayers.	For an individual taxpayer under the age of 65, retirement income from a pension or annuity of up to $4,800 is exempt (for a taxpayer age 65 or older, $7,500 is exempt). (For married taxpayers filing jointly, the exemption is reduced by 50¢ for each dollar of AGI over $32,000; for a married taxpayer filing separately, the exemption is reduced by 50¢ for each dollar of AGI over $16,000; and, for an individual taxpayer, the exemption is reduced by 50¢ for each dollar of AGI over $25,000.)
Vermont	State computation begins with federal taxable income. No subtraction.	Individual taxpayer’s pension income is generally taxable.

Virginia	Social Security benefits subtracted from federal AGI.	The $12,000 deduction available to an individual taxpayer age 65 or older is reduced dollar-for-dollar for every dollar that the taxpayer’s adjusted federal AGI exceeds $50,000 ($75,000 for married taxpayers). For a married taxpayer filing separately, the deduction is reduced by a dollar for every dollar that the total combined adjusted federal AGI of both spouses exceeds $75,000. As of 2006, the $6,000 income deduction from federal AGI previously available to an individual taxpayer age 62 through 64 has been completely phased-out.
Washington	No individual income tax.	No individual income tax.
West Virginia	State computation begins with federal AGI. No subtraction.	Individual taxpayer’s pension income is generally taxable. However, subject to some qualification, an individual taxpayer who, by the last day of the tax year, has reached the age of 65 may deduct up to $8,000 to the extent that amount was includable in federal AGI.
Wisconsin	Partial exclusion (no more than 50% of Social Security benefits taxable). Full exclusion effective beginning in tax year 2008.	Individual taxpayer’s pension income is generally taxable.
Wyoming	No individual income tax.	No individual income tax.