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2014 CCH Whole Ball of Tax
What’s the State Tax Picture on Where to Spend Your Retirement? Wolters Kluwer, CCH Analyzes Significant Updates for 2014
(RIVERWOODS, ILL., January 2014) – The weather, distance from family members and a host of other factors can affect decisions on the best places to live – especially when contemplating locations for retirement. Local economic trends, including property values and especially state or municipal tax rates also play a major role on where individuals and families decide to call home. CCH, a part of Wolters Kluwer and a leading global provider of tax, accounting and audit information, software and services (CCHGroup.com) takes a look at state tax rates, changes and compares differences across the nation.
“Costs of living are obviously a huge consideration in deciding where to live or retire to,” said Sandy Weiner, JD, State Tax Analyst for Wolters Kluwer, CCH. “Retirees should really do their homework on the types of taxes they’d be responsible for paying and the rates they’d be taxed at when comparing different locations.”
Taxes that retirees should consider include:
- State taxes on retirement benefits;
- State income tax rates;
- State and local sales tax;
- State and local property taxes; and
- State estate taxes.
Taxability of Retirement Benefits Varies State-to-State
Seven states do not tax individual income – retirement or otherwise: 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 2013 and remain the same in 2014).
In the other 41 states and the District of Columbia, tax treatment of retirement benefits varies widely. For example, some states exempt all pension income or all Social Security income. Other states provide only partial exemption or credits and some tax all retirement income.
States exempting pension income entirely for qualified individuals are Illinois, Mississippi and Pennsylvania. States exempting a portion of pension income include: Arkansas, Colorado, Delaware, Georgia, Hawaii, Iowa, Kentucky, Louisiana, Maine, Maryland, Michigan, Missouri, Montana, New Jersey, New Mexico, New York, Oklahoma, South Carolina, Utah, Virginia and Wisconsin. States generally taxing pension income include: Arizona, California, Connecticut, District of Columbia, Idaho, Indiana, Kansas, Massachusetts, Minnesota, Nebraska and North Carolina beginning with the 2014 tax year, North Dakota, Rhode Island, Vermont and West Virginia.
(See chart below for additional detail.)
Significant State Tax Reforms
Among states announcing or proposing changes to income tax for retirement plans in 2013 include:
- Kentucky: The Kentucky Blue Ribbon Commission on Tax Reform’s proposed reduction in the individual income tax pension exclusion from $41,110 to $30,000 was introduced but not enacted.
- Maine: In 2012, a law was enacted to revise the income tax deduction for certain retirement benefits for tax years beginning after 2013. The changes raise the deduction from $6,000 to $10,000 (reduced by the total amount of the taxpayer’s Social Security benefits and Federal Railroad Retirement benefits). The deduction is also expanded to include all federally taxable pension income, annuity income and individual retirement account (IRA) distributions, except pick-up contributions for which a deduction has been allowed.
- Michigan: The deduction for pension benefits for senior citizens is curtailed based on the taxpayer’s birth year and household resources. Previously, this deduction was limited by a dollar amount, but no other limitation applied. Specifically, for persons born before 1946, the deduction for pension benefits is unchanged (see chart below). However, for persons who have not yet reached age 67 and who are born in 1946 through 1952, the deduction for pension benefits is limited to $20,000 for a single return and $40,000 for a joint return. Once the person reaches age 67, the pension benefits deduction is no longer applicable. However, all taxpayers who are age 67, regardless of the year they are born, claim a deduction of $20,000 for a single return and $40,000 for a joint return against all types of income in lieu of claiming the social security deduction and personal exemption.
- North Carolina: The $2,000 deduction for income from private retirement plans is repealed beginning with the 2014 tax year.
- Oregon: The pension income credit against personal income taxes was extended for an additional six years.
While some states tax pension benefits, only 14 states impose tax on Social Security income: Colorado, Connecticut, Iowa, Kansas, Minnesota, Missouri, Montana, Nebraska, New Mexico, New Jersey, North Dakota, Rhode Island, Vermont and West Virginia. These 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.
(See chart below for full detail on Taxation of Retirement Income.)
State Income, Property, Sales Taxes Can Add Up
In addition to state taxes on retirement benefits, other taxes that seniors should consider when evaluating the financial implications of where they may retire include:
- State income tax rates. For example, income tax rates also can have a significant financial impact on retirees in determining where they want to live and can vary widely across the country.
While seven states have no income tax and two tax only interest and dividend income, several have a relatively low income tax rate across all income levels. For example, the highest marginal income tax rates in Arizona, Kansas, New Mexico and North Dakota are below 5 percent. Some states have a relatively low flat tax regardless of income, with the three lowest: Indiana (3.4 percent), Michigan (4.25 percent) and Pennsylvania (3.07 percent) for 2014. The Illinois flat tax rate will be reduced from 5% to 3.75 percent in 2015.
- State and local sales taxes. Forty-five states and the District of Columbia impose a state sales and use tax (only Alaska, Delaware, Montana, New Hampshire and Oregon do not impose a state sales and use tax). States with a state sales tax rate of 7 percent include Indiana, Mississippi, New Jersey, Rhode Island and Tennessee. California has a state sales tax rate of 7.5 percent. Local sales and use taxes, imposed by cities, counties and other special taxing jurisdictions, such as fire protection and library districts, also can add significantly to the rate.
- State and local property taxes. While property values have declined over recent years in many areas – that has not necessarily been the case for property taxes. However, many states and some local jurisdictions offer senior citizen homeowners some form of property tax exemption, credit, abatement, tax deferral, refund or other benefits. These tax breaks also are available to renters in some jurisdictions. The benefits typically have qualifying restrictions that include age and income of the beneficiary.
- State estate taxes. Estate taxes also can influence where seniors want to retire. Rules vary from state to state as well as from federal estate tax laws. For example, 18 states impose a tax on estates valued below the $5.25 million federal threshold for 2013 ($5.12 million for 2012); only Delaware, Hawaii and North Carolina use the federal exclusionary amount. However, three states have no estate tax at all – Kansas, Oklahoma and Arizona.
“The American Taxpayer Relief Act brings more clarity on the federal level that only estates above the $5 million mark indexed for inflation will be subject to the federal estate tax,” said Wolters Kluwer, CCH Estate Planning Analyst James C. Walschlager, MA. “However, the threshold in some states can be below $1 million for state estate taxes, which can impose additional planning challenges.”
About CCH, a part of Wolters Kluwer
CCH, a part of Wolters Kluwer (CCHGroup.com) is a leading global provider of tax, accounting and audit information, software and services. It has served tax, accounting and business professionals since 1913. Among its market-leading solutions are The ProSystem fx® Suite, CCH Axcess™, CCH® IntelliConnect®, Accounting Research Manager® and the U.S. Master Tax Guide®. CCH is based in Riverwoods, Ill. Follow us on Twitter @CCHMediaHelp. Wolters Kluwer (www.wolterskluwer.com) is a market-leading global information services company. Wolters Kluwer is headquartered in Alphen aan den Rijn, the Netherlands. Its shares are quoted on Euronext Amsterdam (WKL) and are included in the AEX and Euronext 100 indices.
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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 for the 2013 tax year unless otherwise noted. 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 |
Generally taxable |
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 plans are 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 |
Generally taxable beginning with 2014 tax year. |
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 and income restrictions apply |
Pennsylvania |
Not taxed |
Not taxed; age restrictions apply |
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; Exemption available with age and income restrictions |
Texas |
No individual income tax |
No individual income tax |
Utah |
Taxed |
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 |
Exempt to a certain level; income restrictions apply. |
Wyoming |
No individual income tax |
No individual income tax |
State Tax Treatment of Social Security, Pension Income
The following CCH analysis provides a general overview of how states treat income from Social Security and pensions for the 2013 tax year unless otherwise noted. 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 is generally taxable. |
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 percent of Social Security benefits received or 25 percent 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. |
An individual taxpayer age 62 to 64 may exclude up to $35,000 of retirement income; up to $4,000 of the maximum exclusion amount may be earned income. An individual 65 or older may exclude up to $65,000. |
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 and certain capital gains on employer securities, are excluded. |
Indiana |
Social Security benefits subtracted from federal AGI. |
Individual taxpayer’s pension income is generally taxable. |
Iowa |
Subtraction allowed equal to 89 percent of federally taxable benefits for tax year 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 |
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 ($10,000 beginning in 2014) (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. |
Up to $27,800, 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 individuals born prior to 1946, up to $48,302 in pension and retirement income is deductible on a single return ($96,605 on a joint return); however, distributions from certain 401(k) or 403(b) plans are taxable. For individuals who are under 67 and born between 1946 and 1952, or for persons 67 and over, up to $20,000 is deductible on a single return ($40,000 on a joint return) in lieu of claiming the social security deduction and personal exemption. Additionally, taxpayers age 65 or older may also be able to deduct part of their interest, dividends and capital gains that are included in AGI. The deduction is limited to a maximum of $10,767 for single filers and $21,534 for joint filers. |
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 100 percent for 2012 and after. Married couples with Missouri AGI greater than $100,000 and single individuals with Missouri AGI greater than $85,000, may qualify for a partial deduction. |
Married couples with Missouri AGI less than $32,000 and single individuals with Missouri AGI less than $25,000, may deduct $6,000 ($12,000 combined filers) of their private retirement benefits, to the extent the amounts are included in their federal AGI.
Partial exemptions available to taxpayers with income levels above the AGI limits listed above. |
Montana |
Separate calculation to determine taxable Social Security benefits. Benefits exempt if income is $25,000 or less for single filers or heads of households or $32,000 for married taxpayers filing jointly and $16,000 for married taxpayers filing separately. |
For an individual taxpayer, up to $3,900 of pension and annuity income is exempt (reduced by $2 for every $1 of federal AGI that exceeds $34,430 or 36,380 if filing joint return). |
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 (100% of income if age 100 or older and not claimed as a dependent on another return), 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 |
Social Security benefits subtracted from federal AGI. |
For an individual taxpayer age
59½ or older, $20,000 of pension and annuity income is exempt. |
North Carolina |
Social Security benefits subtracted from federal taxable income. |
Prior to the 2014 tax year, 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 age 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. |
Up to $10,000 of retirement benefits from a private pension is exempt for an individual taxpayer age 65 or older, but not to exceed the amount included in federal AGI. |
Oregon |
Social Security benefits subtracted from federal taxable income. |
An individual taxpayer age 62 or older with household income of less than $22,500 ($45,000 for joint filers) 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 if taxpayer eligible to retire and has retired. |
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. |
South Dakota |
No individual income tax. |
No individual income tax. |
Tennessee |
Only dividends and interest are taxable. |
Only dividends and interest are taxable. Taxpayers 65 or older with total income from all sources of $33,000 or less are exempt. |
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. An eligible retiree under age 65 and born before 1953 is allowed a nonrefundable retirement credit equal to the lesser of $288 or 6 percent 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 AGI 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. |
A $12,000 deduction is available to an individual taxpayer age 75 or older. For taxpayers 65 and older born after 1938, the deduction 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 |
Social Security benefits subtracted from federal AGI. |
Taxpayers age 65 or older may subtract up to $5,000 if federal AGI is less than $15,000 ($30,000 for married taxpayers). |
Wyoming |
No individual income tax. |
No individual income tax. |
SOURCE: Wolters Kluwer, CCH: 2014.
Permission for use granted.
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