The amount of taxes you pay on different forms of retirement income largely comes down to your state.
When you live in America, one thing you’ve likely come to accept is the tax system. There are taxes on your income, products and services you buy, property you own, inheritance you receive, and retirement income. The good thing about the latter is that it’s more avoidable than other forms of taxes.
How much you wind up paying in taxes on your retirement income largely comes down to where you reside, as some states’ tax laws around retirement income (Social Security, retirement accounts, and pensions) are much friendlier than others.
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States that do not tax retirement income in some form
The following seven states do not tax some forms of retirement income, including Social Security, retirement account withdrawals, and pensions. Some states exempt all, while others exempt one or two:
- Arkansas: As long as you’re 59 1/2 years old, up to $6,000 is exempt annually from IRA distributions and pension plans.
- Illinois: All retirement income is exempt, including Social Security, retirement account withdrawals, and pensions.
- Iowa: After age 55, distributions from retirement accounts and pensions are exempt. Social Security benefits are exempt regardless.
- Mississippi: All retirement income is exempt, including Social Security, retirement account withdrawals, and pensions. Early withdrawals are not exempt from state taxes and will be treated like regular taxable income.
- New Hampshire: Social Security benefits and pension income are exempt. Interest or dividends paid through a retirement account (like a traditional IRA) used to be taxed, but that has been phased out this year.
- Pennsylvania: All retirement income is exempt, including Social Security, retirement account withdrawals, and pensions.
- South Carolina: Up to a certain amount is tax-deductible for retirement accounts and pensions. If you’re younger than 65, up to $3,000 of retirement income is deductible; up to $10,000 is tax-deductible if you’re 65 or older. Social Security benefits are exempt.
States with no income tax at all
Nine states currently don’t have any income taxes at all. This not only applies to regular income, such as from your employer, but also distributions you receive from sources like retirement accounts, pensions, and Social Security. Below are the nine states:
- Alaska
- Florida
- Nevada
- New Hampshire
- South Dakota
- Tennessee
- Texas
- Washington
- Wyoming
Most people won’t pay taxes on Social Security benefits
Social Security is often the primary source of retirement income for many people. Luckily, most recipients won’t have to worry about paying taxes on those benefits. As it stands, 41 states and Washington, D.C., don’t tax Social Security benefits. Below are the nine states that still have a Social Security tax:
- Colorado
- Connecticut
- Minnesota
- Montana
- New Mexico
- Rhode Island
- Utah
- Vermont
- West Virginia (It will be completely phased out in 2026.)
The fact that most people can avoid state taxes on Social Security is the good news. The asterisk to this is that, regardless of a state’s Social Security tax rules, federal tax rules still apply. How much you owe on the federal level comes down to what the IRS considers your “combined income.”
Your combined income includes your adjusted gross income (AGI), half of your annual Social Security benefit, and any nontaxable interest you receive (like some forms of bonds). After calculating your combined income, the IRS uses the following ranges to determine how much of your benefits are eligible to be taxed:
| Percentage of Taxable Benefits Added to Income | Filing Single | Married, Filing Jointly |
|---|---|---|
| 0% | Less than $25,000 | Less than $32,000 |
| Up to 50% | $25,000 to $34,000 | $32,000 to $44,000 |
| Up to 85% | More than $34,000 | More than $44,000 |
Data source: IRS. Table by author.
The amount of your Social Security benefits that are eligible to be taxed is added to your regular income and then taxed at your normal income tax rate. For example, if you’re single with a combined income of $30,000, up to $15,000 of your Social Security benefits are eligible to be added to your other forms of income and then taxed at your rate. The percentages are not how much your actual benefits are taxed.