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CCH can assist you with stories, including interviews with CCH subject experts. Also, the 2010
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.

 
Release (23) | Back to WBOT

2010 CCH Whole Ball of Tax

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

State of Retirement: Where Retirees Call Home Impacts Their Taxes

(RIVERWOODS, ILL., January 2010) – With more baby boomers reaching retirement age and more retirees looking at how to stretch their retirement income, seniors need to closely evaluate the tax consequences of where they live, according to CCH, a Wolters Kluwer business and a leading provider of tax, accounting and audit information, software and services (CCHGroup.com).

“Taxes are only one of many financial considerations retirees need to think about. However, it’s important they look at all the different types of tax issues that can impact their retirement finances – including income tax, tax rates, sales tax and estate taxes,” said CCH State Tax Analyst Kathleen Thies, JD. “Trying to assess this can be particularly challenging in the current economy where most states are evaluating new taxes to shore up revenue shortfalls.”

Below CCH examines the tax treatment of what seniors earn, buy and leave to their heirs.

State Income Tax on Retirement Benefits Varies

Retirement income is safe from state income taxes in 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 2009).

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.

Among states announcing changes to income tax for retirement plans in 2009 were:

  • Hawaii , which will start to assess personal state income tax on distributions from certain annuity and deferred compensation plans as applicable to tax years beginning on or after January 1, 2009.
  • Illinois , clarified its position in 2009 that all income from pension plans of a governmental agency or unit can be subtracted from state income tax regardless of whether the plan is a qualified plan under federal income tax law.
  • Missouri , which starting in 2010 is phasing in an income tax deduction for all retirement benefits from military service in the U.S. armed forces, including reservists and National Guard, with all military retirement income deductible as of 2016.
  • New York ,clarified its position in 2009 that distributions that are attributable to a rollover contribution to an IRA are not included in New York taxable income. However, gains from the rollover could be subject to tax.

Additionally, most states have moved 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. 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.

However, given the revenue squeeze most states find themselves in currently, many states did not increase their exemption thresholds for Social Security income tax.

“In prior years, Social Security exemption thresholds in many states that tax retirement benefits were going up at a steady pace, allowing seniors to keep more of their retirement income safe from taxes,” Thies said. “With fewer states raising the exemption thresholds, seniors won’t be getting as big of a break as they may have hoped.”

Factoring in State Income 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.

While states generally are reluctant to increase income tax rates, current budget shortfalls have many states re-evaluating their income tax rates. Both California and New York enacted income tax rate increases in 2009, however, neither tax Social Security benefits though both tax pension income to some extent. Nine other states have proposals for income tax increases pending.

States with among the highest maximum 2009 income taxes include California (with a maximum marginal state income tax rate of 10.55 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).

However, most retirees likely don't fall into the state’s highest income tax bracket, so it’s more important individuals look at their specific situation.

For example, some states may have a very high income tax rate, but it applies only to very high income individuals. In the case of California, its maximum 10.55 percent income tax is for income of more than $1 million. New Jersey also has one of the highest maximum income tax brackets – 8.97 percent on income of more than $500,000. However, the next tax rate is much lower at 6.37 percent for couples earning more than $150,000 and singles with income of more than $75,000.

On the other hand, some states have high income tax rates on relatively modest incomes. For example, Maine’s highest tax rate of 8.5 percent applies to income of more than $40,350 for couples and $20,150 for single filers in 2009. Oregon’s top income tax rate of 9 percent applies to income above just $15,200 for couples or $7,600 for single filers. However, Oregon is one of just five states with no sales tax.

Property and Sales Tax Mean More Out of Seniors’ Pockets

While income tax rates often are top of mind, other taxes also can be costly in retirement years, as seniors may stop working but they continue to shop and need a place to live.

“Local municipalities and jurisdictions rarely assess an income tax on top of the state income tax. However, in most areas of the country, property tax and sales tax can include a state component as well as a county, city or other local taxing body component,” said Thies. “So the prevailing tax rates may change anytime one of these groups needs additional revenues.”

Sales Tax

Some states have no sales tax, while others have taxes of 7 percent or more.

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, followed by Alabama, Hawaii, Georgia, Louisiana, New York, South Dakota, Virginia and Wyoming – all with sales tax rates of 4 percent.

On the other end of the spectrum, California has the highest effective sales tax rate. It increased as of April 1, 2009 to a minimum statewide base rate of 8.25 percent. Five other states have sales tax rates of 7 percent: Indiana, Mississippi, New Jersey, Rhode Island and Tennessee.

Other states with sales tax above 6 percent include Minnesota (6.875%), Nevada (6.85%), Washington (6.5%), and Illinois, Massachusetts and Texas, all with 6.25 percent sales tax. Adding to the complexity is that not all items are taxed at the highest rate. For example, many states have lower sales tax rates on certain grocery foods or medicines.

“Six states and the District of Columbia increased their sales tax in 2009, including California, Massachusetts, Minnesota, Nevada, North Carolina and Utah. More increases are likely as cash-strapped states look for revenue,” said CCH Senior State Tax Analyst Carol Kokinis-Graves, JD. “As a regressive tax, sales tax increases generally have a greater impact on lower- and middle-income people, including retirees relying primarily on Social Security income.”

In addition to the state tax, retirees also should look closely at how much sales tax is assessed by the local municipalities in the areas they’re considering living.

Municipalities in most states assess their own sales tax on top of the state sales tax. Exceptions include Connecticut, the District of Columbia, Kentucky and Maine, which do not provide authorization for municipalities to impose their own sales tax. Six additional states – Indiana, Maryland, Massachusetts, Michigan, Mississippi and Rhode Island – do not provide broad taxing authority to municipalities. However, they do allow certain municipalities to impose taxes on specific transactions, most usually, taxes on lodging and food and beverages.

Property Tax

Many states and some local jurisdictions offer some form of property tax exemption, credit, abatement, tax deferral, refund or other benefit to senior citizen homeowners. These tax breaks also are available to renters in some jurisdictions. The benefits typically have qualifying restrictions that include age of the homeowner and their income.

As property taxes can represent a significant portion of a retiree’s expenses, it is a good idea to clearly understand the existing property tax rates as well as how property tax rates have changed over the years.

Estate Tax

Retirees considering what they want to leave to their heirs may also want to consider how where they live will affect their estate tax.

As a result of the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA), which steadily chipped away at the estate tax, 17 states decoupled from the federal estate tax laws to retain 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.

“With changes at the federal level to estate tax law likely, many states also will be reassessing their estate taxes,” said Thies.

For more information on estate tax issues, see Release 12.

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. CCH is based in Riverwoods, Ill. Wolters Kluwer is a leading global information services and publishing company. Wolters Kluwer is headquartered in Alphen aan den Rijn, the Netherlands (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 these forms of retirement 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 these forms of retirement 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 2009, 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 2009 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.

Up to $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 2009, up to $24,500, 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 2009, up to $45,120 in pension and retirement income is deductible on a single return ($90,240 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: 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
59½ 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 2009, $10,000 of retirement benefits from a private pension is exempt for an individual taxpayer 65 or older with AGI of $100,000 or less for a single taxpayer, a head of household or a married taxpayer filing separately ($200,000 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.

An eligible retiree age 65 or older is allowed a nonrefundable retirement credit of $450, and an eligible retiree under age 65 is allowed a nonrefundable retirement credit equal to the lesser of $288 or 6% of the eligible retirement income for the taxable year for which the retiree claims the tax credit. These credits are phased out at 2.5 cents per dollar by which modified adjusted gross income exceeds $16,000 for married individuals filing separately, $25,000 for singles, and $32,000 for heads of household and joint filers.

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.

Source: CCH, 2010.

Permission for use granted.

 

       


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