There are several states in the country that do not tax federal pensions. This is good news for retirees looking to relocate. For the most part, individual states are free from federal control regarding how to tax pensions, however, some restrictions and limitations apply.
Significance
There are ten states that eliminate all local, state and federal income from taxation. These states are Pennsylvania, New York, Alabama, Illinois, Hawaii, Kansas, Massachusetts, Michigan, Mississippi and Louisiana. State tax policies are unable to discriminate against federal civil service pensions.
Expert Insight
Kansas is the only state out of all of these that taxes Social Security, but only to the extent that it is subject to federal taxes. Massachusetts and Kansas do not eliminate private sector retirement income, but most of the other states permit a relatively broad exclusion. Kansas residents making less than $75,000 annually can exclude Social Security money from state taxes. Pennsylvania permits a total exclusion.
Potential
Based on many factors, Delaware and Alaska are considered to be the two best states when it comes to giving retirees a good deal when it comes to taxes. On the other side of the spectrum, Pennsylvania and New Jersey are the two worst states when it comes to pensions.
Considerations
Retirees looking for cheap places to retire should also consider relocation to Delaware, Montana, Alaska, New Hampshire and Oregon. None of these states collect sales taxes. Some of the states that have single rates for sales taxes are West Virginia, Virginia, Connecticut, New Jersey, Vermont, Rhode Island, Hawaii, Indiana, Maryland, Kentucky, Maine, Mississippi and Rhode Island.
Prevention/Solution
A good resource to compare taxes state by state is the Federation of Tax Administrators (FTA) website. The website details in full state income taxes, state sales taxes, state excise taxes and historical tax rate information. Before deciding on a retirement location, it is a good idea to do your homework first.
