Topic:
RETIREMENT AND PENSION SYSTEMS; SOCIAL SERVICES; INCOME TAX;
Location:
TAXES - INCOME;

OLR Research Report


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.

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 )

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