February 24, 2004	2004-R-0219
Income Tax on Social Security and Pensions
By: Judith Lohman, Chief Analyst

You asked whether the General Assembly can exclude income from Social Security and other types of pensions from the state income tax.  You also asked for background information on the issue. This report has been updated by OLR Report 2010-R-0119.

SUMMARY

     The General Assembly could pass a law to exclude pension and Social Security income from the state income tax.  Connecticut’s income tax already excludes most or all federally taxable Social Security and railroad retirement benefits from the state tax.  But Connecticut’s income tax does not exempt income from private pensions, federal civil service and military pensions, and state and local government pensions.

     According to the National Conference of State Legislatures (NCSL), of the 41 states that have broad-based personal income taxes, Connecticut and six others provided no broad exemption for pension income in the 2003 tax year.  

STATE AUTHORITY OVER PENSION TAXATION

     Although states are generally free to decide how they will tax pension income under their state income taxes, the U.S. Supreme Court has imposed some limits. In 1989, the Court ruled that states could not provide more favorable tax treatment for state pensions than for federal

civil service pensions (Davis v. Michigan Department of Treasury, 498 U.S. 803 (1989)).  And in 1992, the Court ruled that states are not allowed to tax U.S. military pensions if they do not tax state pensions (Barker v. Kansas, 503 U.S. 594 (1992)).  

     Within these limits, states are free to decide how to tax pension and Social Security income.  They may also treat public pension income more favorably than private pension income.

CONNECTICUT TAX ON PENSION INCOME

Except for Social Security and railroad retirement benefits, Connecticut’s state income tax treats income from public and private pensions the same as any other income. The state does not have any special exemptions for pension income.

Most Social Security and railroad retirement benefits are exempt from the Connecticut income tax.  The exemptions occur in two ways. First, because Connecticut bases its state tax on each taxpayer’s federal adjusted gross income (AGI), federal tax exemptions for a portion of Social Security and railroad retirement income are automatically incorporated into state tax calculations.  Second, Connecticut explicitly allows additional state exemptions for federally taxable Social Security and railroad retirement benefits.

Federal Income Tax Exemption

For federal tax purposes, Social Security and Tier I Railroad Retirement benefits are treated the same. The benefits are partly taxable for a recipient whose income exceeds a specified amount. The income counted for determining the exemption is all the non-Social Security or railroad retirement income a person receives (including any tax-exempt interest) plus 50% of his Social Security or railroad retirement benefits for the year.  If that total exceeds $32,000 for a married couple filing jointly or $25,000 for a single person, head of household, or married person filing separately, then 50% of the Social Security or railroad retirement benefits are taxable.  If the total exceeds $44,000 for joint filers or $34,000 for other filers, 85% of Social Security or railroad retirement benefits are taxable.

Connecticut Income Tax Deduction

The starting point for determining the Connecticut income tax is federal AGI and federal AGI includes any federally taxable Social Security or railroad retirement benefits. But state law allows a Connecticut taxpayer to deduct the following before figuring his Connecticut tax: (1) 75% or 100% of his federally taxable Social Security benefits, depending on income and (2) 100% of any railroad retirement benefits in excess of the Social Security benefits he deducts.

     A Connecticut taxpayer can deduct 100% of his federally taxable Social Security benefits if he is (1) single or married filing separately and his federal AGI is less than $50,000 and (2) married filing jointly or a head of household whose federal AGI is less than $60,000.  A filer whose federal AGI equals or exceeds the applicable threshold can deduct 75% of his federally taxable benefits.

PENSION INCOME TAXES IN OTHER STATES

According to NCSL, of the 41 states that have broad-based personal income taxes, 26 provide a full exemption for Social Security benefits; 10 exempt all federal, state, and local pension income; and 27 provide a full or partial exemption for private pension income. 

Pennsylvania is the only state that exempts all public and private pension income from its income tax.   An additional nine states exclude all federal, state, and local pension income:  Alabama, Hawaii, Illinois, Kansas, Louisiana, Massachusetts, Michigan, Mississippi, and New York. 

Table 1 shows how the other 40 states with income taxes treat public and private pension and Social Security (SS) income, according to NCSL. Information applies to the 2003 tax year unless noted. Federal law prohibits states from taxing railroad retirement (RR) benefits, so the exemptions shown in Column 5 apply only to Social Security. Unless otherwise noted, the total income exemption for all pensions may not exceed the individual exemption amounts shown.

Table 1: State Income Tax Exemptions for Pensions

State	State/Local	Federal Civil Service	Military	Social Security	Private
Alabama	100%	100%	100%	100%	100% for defined benefit plans
Arizona	$2,500	$2,500	$2,500	100%	None
Arkansas	$6,000	$6,000	$6,000	100%	$6,000 (includes IRA distributions after age 59 ½)
California	None	None	None	100%	None

-Continued-

State	State/Local	Federal Civil Service	Military	Social Security	Private
Colorado	Age 55-65: $20,000 Age 65+: $24,000	Age 55-65: $20,000 Age 65+: $24,000	Age 55-65: $20,000 Age 65+: $24,000	Age 55-65: $20,000 Age 65+: $24,000	Age 55-65: $20,000 Age 65+: $24,000
Delaware	Under 60: $2,000 Age 60+: $12,500	Under 60: $2,000 Age 60+: $12,500	Under 60: $2,000 Age 60+: $12,500	100%	Under 60: $2,000 Age 60+: $12,500
District of Columbia	Age 62+: $3,000	Age 62+: $3,000	Age 62+: $3,000	100%	Age 62+: $3,000
Georgia	Age 62+: $15,000	Age 62+: $15,000	Age 62+: $15,000	100%	Age 62+: $15,000
Hawaii	100%	100%	100%	100%	100% for contributory plans
Idaho (2002)	Age 65+ or 62+ if disabled: $19,920 single/$29,880 joint minus SS /RR benefits (exemption limited to certain public safety officer benefits)	Age 65+ or 62+ if disabled: $19,920 single/$29,880 joint (minus SS/RR benefits)	Age 65+ or 62+ if disabled: $19,920 single/$29,880 joint (minus SS/RR benefits)	100%	None
Illinois	100%	100%	100%	100%	100% for qualified plans
Indiana	None	Age 62+: $2,000 minus SS benefits	None	100%	None
Iowa (2002)	Age 55+: $6,000 single/ $12,000 joint	Age 55+: $6,000 single/ $12,000 joint	Age 55+: $6,000 single/$12,000 joint	50% under certain income	Age 55+: $6,000 single/ $12,000 joint
Kansas	100%	100%	100%	Same as federal	None
Kentucky	$36,414 for credit earned before 12/31/97; prorated for later credit	$36,414 for credit earned before 12/31/97; prorated for later credit	$36,414 for credit earned before 12/31/97; prorated for later credit	100% for income under $36,414	$36,414 for credit earned before 12/31/97; prorated for later credit

-Continued-

State	State/Local	Federal Civil Service	Military	Social Security	Private
Louisiana	100%	100%	100%	100%	Age 65+: $6,000 single/ $12,000 joint
Maine	$6,000 minus SS/RR benefits	$6,000 minus SS/RR benefits	$6,000 minus SS/RR benefits	100%	$6,000 (applies to 401(a), 403, and 457(b) plans)
Maryland (2002)	Age 65+: $18,500 minus SS/RR benefits	Age 65+: $18,500 minus SS/RR benefits	Age 65+: $18,500 minus SS/RR benefits	100%	Age 65+: $18,500 minus SS/RR benefits
Massachusetts	100%	100%	100%	100%	None
Michigan	100%	100%	100%	100%	$34,920 single/ $69,840 joint minus public retirement benefits
Mississippi	100%	100%	100%	100%	100% for qualified plans
Missouri	$6,000 single/ $12,000 joint (reduced by amount total income exceeds certain limits)	$6,000 single/ $12,000 joint (reduced by amount total income exceeds certain limits)	$6,000 single/ $12,000 joint (reduced by amount total income exceeds certain limits)	Same as federal	$4,000 (counted towards the $6,000 cap if applicable)
Montana	Up to $3,600 for filer with AGI under $30,000	Up to $3,600 for filer with AGI under $30,000	Up to $3,600 for filer with AGI under $30,000	Taxable if income (including SS) is greater than $25,000 single/ $32,000 joint	Up to $3,600 for filer with AGI under $30,000
Nebraska	None	None	None	Same as federal	None
New Jersey	Age 62+: $15,000 single/ $20,000 joint	Age 62+: $15,000 single/ $20,000 joint	100%	100%	Age 62+: $15,000 single/ $20,000 joint

-Continued-

State	State/Local		Federal Civil Service	Military	Social Security	Private
New Mexico	Age 65+: $8,000 single/ $16,000 joint (phased out at higher incomes)	Age 65+: $8,000 single/ $16,000 joint (phased out at higher incomes)		Age 65+: $8,000 single/ $16,000 joint (phased out at higher incomes)	Counts toward general exemption	Age 65+: $8,000 single/ $16,000 joint (phased out at higher incomes)
New York	100%	100%		100%	100%	$20,000
North Carolina	$4,000 single/ $8,000 joint	$4,000 single/ $8,000 joint		$4,000 single/ $8,000 joint	100%	$2,000 single/ $4,000 joint
North Dakota	$5,000 minus SS (limited to certain public safety retirements)	$5,000 minus SS		$5,000 minus SS	Same as federal	None
Ohio	Certain tax credits apply (see notes)	Certain tax credits apply (see notes)		Certain tax credits apply (see notes)	100%	See notes
Oklahoma	$5,500	$5,500		$5,500	100%	$4,400 (applies to 401, 457, 408, 403(a) and (b) and lump sum distributions)
Oregon	Credit up to 9% of taxable pension income	Credit up to 9% of taxable pension income		Credit up to 9% of taxable pension income	100%	Credit up to 9% of taxable pension income
Pennsylvania	100%	100%		100%	100%	100%
Rhode Island	None	None		None	Same as federal	None
South Carolina	Under 65: $3,000 Age 65+: $10,000	Under 65: $3,000 Age 65+: $10,000		Under 65: $3,000 Age 65+: $10,000	100%	Under 65: $3,000 Age 65+: $10,000
Utah	Age 65+: $7,500 single/$15,000 joint Under 65: $4,800 single/$9,600 joint	Age 65+: $7,500 single/$15,000 joint Under 65: $4,800 single/$9,600 joint		Age 65+: $7,500 single/$15,000 joint Under 65: $4,800 single/$9,600 joint	Age 65+: $7,500 single/$15,000 joint Under 65: $4,800 single/$9,600 joint	Age 65+: $7,500 single/$15,000 joint Under 65: $4,800 single/$9,600 joint
Vermont	None	None		None	Same as federal	None

-Continued-

State	State/Local	Federal Civil Service	Military	Social Security	Private
Virginia	Age 62-64: $6,000 Age 65+: $12,000	Age 62-64: $6,000 Age 65+: $12,000	Age 62-64: $6,000 Age 65+: $12,000	100%	Age 62-64: $6,000 Age 65+: $12,000
West Virginia	100% for public safety pensions All others: $2,000	$2,000	$2,000 plus amount based on years of service	Full	None
Wisconsin	None	None	100%	Up to 50%	None

Source:  National Conference of State Legislatures

Notes:

Arkansas: Exemption total excludes SS/RR retirement income.

Colorado: SS/RR retirement income not taxed by the federal government is excluded from AGI for state income tax purposes.

Delaware: Exemption total excludes SS/RR retirement income.

Georgia: Exemption total excludes SS/RR retirement income plus up to $4,000 of earned income. Exemption will rise to $55,000 for tax year 2006 and to $65,000 for 2007.

Indiana: Taxpayers over 65 may be entitled to a tax credit ranging from $40 to $100, depending on federal AGI.

Iowa: SS income is not calculated as part of the exemption.

Minnesota: The exemption amount may be reduced depending on filing status and receipt of untaxed SS/RR benefits. Exemption does not apply to those with federal AGIs over $33,700 for single filers and $42,000 for joint filers.

Missouri: Exemptions do not apply to those with incomes over $25,000 for single filers and $32,000 for joint filers.

New Jersey: Taxpayers over 62 are entitled to an additional income exclusion to allow them to reach the amount of the pension exemption. The sum of the pension exemption and the additional exemption may exceed the pension exemption if the recipient is ineligible for SS retirement benefits.

New Mexico: The exemption is fully phased out for incomes that exceed $51,000.

Ohio: A retirement income tax credit of up $200 is allowed, depending on income. A senior citizen tax credit of $25 per tax return is allowed to filers age 65+. A one-time tax credit is available for lump-sum distributions to people over 65.  The credit is $50 multiplied by remaining life expectancy.

Oklahoma: The private pension exemption is available only to those with incomes under $25,000 for single and $50,000 for joint filers.

Oregon: Tax credit of up to 9% of taxable pension income is available to recipients of pension income, including most private pension income, whose household income was less than $22,500 for single and $45,000 for joint filers and who received less than $7,500/$15,000 in SS or RR benefits. The credit is the lesser of tax liability or 9% of taxable pension income.

South Carolina: Each taxpayer over 65 is entitled to an income exemption of up to $15,000 ($30,000, married filing jointly) minus the retirement income exemption claimed.

West Virginia: Each taxpayer over 65 can claim an $8,000 exemption, from which the pension exclusions noted in the table must be deducted. For tax year 2001 and following years, military retirees may add to the $2,000 exclusion an amount equal to 2% of the retiree's pension or $30,000, whichever is less, times years of service. West Virginia also has an income exclusion to benefit people who retired under private-sector defined benefit plans that have failed to provide benefits as originally scheduled, with the amount of the benefit based on the loss of potential income.

JL:ts