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CCH can assist you with stories, including interviews with CCH subject experts. Also, the 2009
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

Visit the CCH Whole Ball of Tax site often as new releases and other updates will be posted throughout the tax season.

CCH provides special CCH Tax Briefings on key topics at: CCHGroup.com/Legislation/Briefings.

 
2009 CCH Whole Ball of Tax
Release (22) | Back to WBOT

2009 CCH Whole Ball of Tax

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

CCH Outlines Tax Considerations for Retirees Searching for Tax-friendly States

(RIVERWOODS, ILL., January 2009) – With savings for millions of older Americans now significantly less than a year ago, retirees and those nearing retirement age are looking more closely to make sure high taxes don’t further tarnish their golden years, according to CCH, a Wolters Kluwer business and a leading provider of tax, accounting and audit information, software and services (CCHGroup.com).

“Individuals factoring taxes into their decision on where they retire need to look at the range of tax obligations they may have as taxes come in all shapes and sizes,” said CCH State Tax Analyst Kathleen Thies, JD. “They also need to understand that taxes change and, with most states experiencing significant budget tightening, 2009 will likely be a year of considerable tax change across the country.”

Among the taxes seniors need to consider, according to Thies, are income tax, property tax and sales tax.

Taxing Retirement Income Varies State to State

Retirees’ income will be safe from state income taxes if they live in one of the seven states that do not tax individual income: Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming. Two other states – New Hampshire and Tennessee – impose income taxes only on dividends and interest (5 percent for New Hampshire and 6 percent for Tennessee for 2008).

Those living in the remaining 41 states or the District of Columbia, are facing a hodge-podge of tax treatments for pension income as each state generally is allowed to determine its own tax treatment of retirement income. As a result, some states exempt all pension income, others some and others none. Those exempting pension income entirely are Pennsylvania and Mississippi. States exempting a portion of pension income include Michigan and Maine. Other states have special restrictions; for example, New Jersey has age restrictions for exempting some pension income from state taxes.

Certain states, such as Illinois, not only exclude from income tax income from federally qualified retirement plans, 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 (AGI), while some states only exempt government or military pensions, but not private pensions.

Additionally, most states now are moving away from taxing Social Security. In addition to the nine states that do not have a broad-based individual income tax, 27 states and the District of Columbia do not tax Social Security income, with Wisconsin being the latest to join the non-taxing rank as of 2008. The other states either tax Social Security income to the same extent that the federal government does or provide breaks for Social Security income, often for lower-income individuals.

For example, both Missouri and Kansas have changed state laws related to taxing Social Security income, with the maximum amount of benefits that may be deducted in Missouri going up to 35 percent in 2008 (50 percent in 2009) with 100 percent being deductible as of 2012. Kansas also is exempting state tax on Social Security income for taxpayers based on income. For 2008, taxpayers with a federal adjusted gross income of $75,000 or less are exempt from paying taxes on Social Security income.

“There has been a trend away from taxing Social Security benefits. However, this may slow as states try to balance the need to hold onto dwindling revenue sources against the needs of seniors in their state to more tax-free income,” Thies said.

Factoring in State Tax Rates

Once retirees determine if their retirement income will be taxed and to what extent, the next thing to factor in is at what rate the state they plan to live in taxes income. This, too, varies state to state.

States with among the highest maximum 2008 income taxes include California (with a maximum marginal state income tax rate of 9.3 percent), District of Columbia (8.5 percent), Hawaii (8.25 percent), Iowa (8.98 percent), Maine (8.5 percent), New Jersey (8.97 percent), Oregon (9 percent) and Vermont (9.5 percent).

But even that is not 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.

Beyond Income Tax; Property and Sales Tax Can Be Significant

Many people focus on income tax at the expense of other taxes, which can be costly in retirement years.

“As a retiree, your income is likely to be significantly lower than when you were working, so income tax will be less of a factor,” Thies said. “Meanwhile, you are still going to go shopping, you may even want to participate in more entertainment activities – which could increase sales taxes – and you still need a place to live. As a result, your other tax obligations may even increase.”

Additionally, Thies notes that states without income taxes have one fewer revenue-raising option. Therefore, they may be more inclined to turn to increases in sales or property tax to shore up their budgets.

Sales Tax  

Some states have no sales tax, while others have taxes as high as 7 percent. Five states – Alaska, Delaware, Montana, New Hampshire and Oregon – have no state sales tax. Of the remaining states, Colorado is at the bottom of the scale with 2.9 percent while five states – Indiana, Mississippi, New Jersey, Rhode Island and Tennessee – are at the top of the list with a 7-percent rate. A chart on state sales tax is available at http://www.cch.com/press/news/2008/20080714t.asp.

In addition to the state tax, retirees also should look closely 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, the following three states and the District of Columbia only impose a state sales and use tax and do not provide authorization for municipalities to impose such a tax: Connecticut, Kentucky and Maine. Six additional states – Indiana, Maryland, Massachusetts, Michigan, Mississippi and Rhode Island – do not provide broad taxing authority to municipalities but do allow certain municipalities to impose taxes on specific transactions – most usually, taxes on lodging and food and beverages.

Property Tax

Property taxes also are a major tax consideration, especially for individuals on a fixed income. These rates vary greatly from state to state and municipality to municipality. It is wise to take a look not only at existing property tax rates but also how property tax rates have changed over the years.

“Property values have been declining, but property taxes haven’t been moving downward as quickly,” said Thies. “Because they can fluctuate, this is a major factor for many seniors.”

Estate Tax

For most people, how you will be taxed when you’re alive is far more important than what your estate will owe in state taxes when you die. However, for the heirs of the well-heeled, this is a consideration. For more information on estate tax issues, see Release 11.

About CCH, a Wolters Kluwer business

CCH, a Wolters Kluwer business (CCHGroup.com) is a leading provider of tax, accounting and audit information, software and services. It has served tax, accounting and business professionals since 1913. Among its market-leading products are The ProSystem fx® Office, CorpSystem®, CCH® TeamMate, 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 globally for professionals in the health, tax, accounting, corporate, financial services, legal and regulatory sectors. Wolters Kluwer has annual revenues (2007) of €3.4 billion ($4.8 billion), maintains operations in over 33 countries across Europe, North America and Asia Pacific and employs approximately 19,500 people worldwide. Wolters Kluwer is headquartered in Amsterdam, the Netherlands. For more information, visit www.wolterskluwer.com.

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State Taxation of Retirement Income

The following chart 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 partially exempt

Idaho

Not taxed

Generally taxable

Illinois

Not taxed

All income from federally qualified pension plan is generally exempt

Indiana

Not taxed

Generally taxable

Iowa

Exempt to a certain level

Exempt to a certain level; age restrictions apply

Kansas

Exemption based on AGI

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, excluding IRA and SEP distributions

Maryland

Not taxed

Exempt to a certain level; age restrictions apply

Massachusetts

Not taxed

Generally taxable

Michigan

Not taxed

Exempt to a certain level, excluding certain 401(k) and 403(b) distributions

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

Wisconsin

Not taxed

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 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 from a qualified pension 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 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 55 through 64 years old can exclude up to $20,000 ($24,000 for a taxpayer aged 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 younger than 60 may deduct pension amounts of up to $2,000, and a taxpayer 60 or older may deduct up to $12,500. Eligible amounts for a taxpayer 60 or older include retirement income (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 2008, an individual taxpayer 62 or older may exclude up to $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 43% of federally taxable benefits for tax year 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 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

For 2008 and thereafter, taxpayers with a federal AGI of $75,000 or less are exempt from any state tax on their Social Security benefits.

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 65 or older is exempt.

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 2008, up to $24,000, generally, in pension income (except income from an IRA, SEP or Keogh) is excludable for an individual taxpayer 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 2008, up to $43,440 in pension and retirement income is deductible on a single return ($86,880 on a joint return); however, distributions from certain 401(k) or 403(b) plans are taxable.

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” (income from Keogh plan, IRA or deferred compensation plan) are exempt.

Missouri

Social Security benefits that are included in federal AGI may be subtracted. The maximum amount of benefits that may be deducted is as follows: 35% for 2008, 50% for 2009, 65% for 2010, 80% for 2011 and 100% for 2012 and after.

An individual taxpayer may deduct from 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:

–$100,000, if married filing jointly;

–$85,000, if married filing separately; or

–$85,000 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 $1 for each $1 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 $2 for every $1 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 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 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 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
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.

A recipient of retirement income may claim an annual credit ranging from $25 to $200, depending on the amount of benefit received during the year. Also, in lieu of the $50 senior citizen income credit (credit eligibility is dependent on age not retirement income) an individual taxpayer 65 or older may claim a credit for a lump-sum distribution from a retirement, pension or profit-sharing plan equaling $50 times the taxpayer’s expected remaining life years. If they choose the lump sum distribution credit, however, they are no longer eligible for the annual senior citizen credit.

Oklahoma

Social Security benefits subtracted from federal AGI.

For 2008, $10,000 of retirement benefits from a private pension is exempt for an individual taxpayer 65 or older with AGI of $62,500 or less for a single taxpayer, a head of household or a married taxpayer filing separately ($125,000 or less for married taxpayers filing jointly or a qualifying widow(er)).

Oregon

Social Security benefits subtracted from federal taxable income.

An individual taxpayer 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 65 or older may deduct up to $10,000. The personal income tax deduction from taxable retirement income can only be claimed 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 younger than 65 of up to $4,800 and retirement income exemption for taxpayers 65 and older of up to $7,500. Deduction and exemption reduced by 50 cents of each $1 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 younger than 65, retirement income from a pension or annuity of up to $4,800 is exempt (for a taxpayer 65 or older, $7,500 is exempt). (For married taxpayers filing jointly, the exemption is reduced by 50 cents for each $1 of AGI over $32,000; for a married taxpayer filing separately, the exemption is reduced by 50 cents for each $1 of AGI over $16,000; and, for an individual taxpayer, the exemption is reduced by 50 cents for each $1 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 65 or older is reduced dollar for dollar for every $1 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 $1 for every $1 that the total combined adjusted federal AGI of both spouses exceeds $75,000

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 age 65 may deduct up to $8,000 to the extent that amount was includable in federal AGI.

Wisconsin

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.

Copyright © 2009, CCH.

Permission for use granted.

 

 

       


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