July 16, 2008	2008-R-0413
state Income Taxes on Pensions
By: Judith Lohman, Chief Analyst

You asked for a summary of income tax exemptions for pension income in Connecticut and the other states with personal income taxes. This report has been updated by OLR Report 2010-R-0119.

summary

Connecticut’s income tax excludes (1) 75% or 100% of federally taxable Social Security income, depending on the taxpayer’s federal adjusted gross income (AGI); (2) 100% of railroad retirement benefits; and (3) starting with the 2008 tax year, 50% of federally taxable military retirement benefits.  Connecticut has no exemptions for other types of pension income.

According to a 2007 survey by the National Conference of State Legislatures (NCSL), of the 41 states with personal income taxes, all but four (Minnesota, Nebraska, Rhode Island, and Vermont) have at least one state income tax exemption for some pension and retirement income. The most common exemptions are for Social Security and military pensions. Many states exempt federal, state, and local government pensions (often with limitations) and 23 states exempt some private pension income. Alabama, Hawaii, Illinois, Mississippi, and Pennsylvania exempt virtually all pension income from their state income taxes.

CONNECTICUT TAX ON PENSION INCOME

Except for Social Security, railroad retirement, and military retirement benefits, Connecticut’s state income tax treats income from public and private pensions the same as any other income. The state has no other special exemptions for pension income.

Social Security and Railroad Retirement

Most Social Security and all 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.

Military Retirement Benefits

Starting with the 2008 tax year, Connecticut exempts 50% of federally taxable military retirement pay from the state income tax.  The exemption applies to federal retirement pay to members of the U.S. Army, Navy, Air Force, Marines, Coast Guard, and Army and Air National Guard.

PENSION INCOME TAXES IN OTHER STATES

According to NCSL, of the 41 states that have broad-based personal income taxes, 26 exempt 100% of Social Security benefits; 12 exempt 100% of military retirement benefits; 10 exempt all federal, state, and local government pension income; and 27 provide a full or partial exemption for private pension income.  Pennsylvania is the only state that has an unlimited exemption for all public and private pension income.  

Table 1 shows how states tax public and private pension and Social Security (SS) income, according to NCSL. Information applies to the 2007 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
Alaska	No income tax.
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)

Table 1: -Continued-

State	State/Local	Federal Civil Service	Military	Social Security	Private
California	None	None	None	100%	None
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
Connecticut	None	None	50% starting in tax year 2008	100% for AGI under $50,000 single/$60,000 joint; 75% for higher AGI	None
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%	None
Florida	No income tax.
Georgia	Age 62+: $30,000 (2007) $35,000 (2008 and after)	Age 62+: $30,000 (2007) $35,000 (2008 and after)	Age 62+: $30,000 (2007) $35,000 (2008 and after)	100%	Age 62+: $30,000 (2007) $35,000 (2008 and after)
Hawaii	100%	100%	100%	100%	100% for contributory plans
Idaho	Age 65+ or 62+ if disabled: $21,900 single/$32,850 joint minus SS /RR benefits (exemption limited to certain public safety officer benefits)	Age 65+ or 62+ if disabled: $21,900 single/$32,850 joint (minus SS/RR benefits)	Age 65+ or 62+ if disabled: $21,900 single/$32,850 joint (minus SS/RR benefits)	100%	None
Illinois	100%	100%	100%	100%	100% for qualified plans

Table 1: -Continued-

State	State/Local	Federal Civil Service	Military	Social Security	Private
Indiana	None	Age 62+: $2,000 ($4,000 per couple) minus SS benefits	Age 62+: $2,000 ($4,000 per couple) minus SS benefits	100%	None
Iowa	Age 55+: $6,000 single/ $12,000 joint Age 65+: $18,000 single/$24,000 joint (2007/08) $24,000 single/$32,000 joint (2009)	Age 55+: $6,000 single/ $12,000 joint Age 65+: $18,000 single/$24,000 joint (2007/08) $24,000 single/$32,000 joint (2009)	Age 55+: $6,000 single/ $12,000 joint Age 65+: $18,000 single/$24,000 joint (2007/08) $24,000 single/$32,000 joint (2009)	50% under certain income. Tax being entirely phased out from 2007 to 2014 (see notes)	Age 55+: $6,000 single/ $12,000 joint Age 65+: $18,000 single/$24,000 joint (2007/08) $24,000 single/$32,000 joint (2009)
Kansas	Kansas pensions: 100% Out-of-state pensions: None	100%	100%	100% if federal AGI is $50,000 or under (2007); $75,000 or under (2008 and after)	None
Kentucky	100% for benefits earned before 1/1/98. Prorated for benefits earned later with exemption cap of $41,110	100% for benefits earned before 1/1/98. Prorated for benefits earned later with exemption cap of $41,110	100% for benefits earned before 1/1/98. Prorated for benefits earned later with exemption cap of $41,110	100% for income under $41,110	100% for benefits earned before 1/1/98. Prorated for benefits earned later with exemption cap of $41,110
Louisiana	Louisiana state pensions: 100% Out-of-state pensions: None	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 (for 401(a), 403, and 457(b) plans only)

Table 1: -Continued-

State	State/Local	Federal Civil Service	Military	Social Security	Private
Maryland (2006)	Age 65+: $21,500 per person minus SS/RR benefits	Age 65+: $21,500 per person minus SS/RR benefits	Age 65+: $21,500 per person minus SS/RR benefits $5,000 exclusion at age 65	100%	Age 65+: $21,500 minus SS/RR benefits.  Not applicable to IRA, Roth IRA, SEP, or Keogh plans.
Massachusetts	Mass. pensions: 100% Out-of-state pensions exempt if home state has reciprocal exemption for Mass. pensions	100%	100%	100%	None
Michigan	Mich. pensions: 100% Out-of-state pensions exempt if home state has reciprocal exemption for Mich. pensions. Otherwise treated like private pensions	100%	100%	100%	$40,920 single/ $81,840 joint minus public retirement benefits for tax year 2006.  Income from deferred comp plans (401(k), 457, 403(b)) not exempt
Minnesota	None	None	None	Same as federal	None

Table 1: -Continued-

State	State/Local	Federal Civil Service	Military	Social Security	Private
Mississippi	100%	100%	100%	100%	100% for qualified plans
Missouri	Greater of $6,000 single/ $12,000 joint (reduced by amount total income exceeds certain limits) or 20% of benefits for 2007 (rising to 100% for 2012) minus amount of any Social Security exclusion. Income limits apply (see notes)	Greater of $6,000 single/ $12,000 joint (reduced by amount total income exceeds certain limits) or 20% of benefits for 2007 (rising to 100% for 2012) minus amount of any Social Security exclusion. Income limits apply (see notes)	Greater of $6,000 single/ $12,000 joint (reduced by amount total income exceeds certain limits) or 20% of benefits for 2007 (rising to 100% for 2012) minus amount of any Social Security exclusion. Income limits apply (see notes)	20% excluded for 2007 to increase to 100% in 2012, subject to income limits	$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
Nevada	No income tax.
New Hampshire	No income tax.
New Jersey	Age 62+: $15,000 single/ $20,000 joint. Income limits apply (see notes).	Age 62+: $15,000 single/ $20,000 joint. Income limits apply (see notes).	100%	100%	Age 62+: $15,000 single/ $20,000 joint. Income limits apply (see notes).
New Mexico	Pension and SS income taxable; RR income exempt.  General income exemption for age 62+: $10,000 single/$16,000 joint.  Exemption phases out with increased AGI.  Full phase-out at $25,500 single /$51,000 joint.

Table 1: -Continued-

State	State/Local	Federal Civil Service	Military	Social Security	Private
New York	NY pensions: 100%; Out-of-state treated like private pensions	100%	100%	100%	Age 59 ½+: $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	Amount included in federal AGI up to a maximum of $10,000 per retiree for all benefits	Amount included in federal AGI up to a maximum of $10,000 per retiree for all benefits	Amount included in federal AGI up to a maximum of $10,000 per retiree for all benefits	100%	Maximum $10,000 for retirees with  income below $37,500 single/$75,000 joint
Oregon	Credit up to 9% of taxable pension income. Income limits apply.	Credit up to 9% of taxable pension income. Income limits apply.	Credit up to 9% of taxable pension income. Income limits apply.	100%	Credit up to 9% of taxable pension income. Income limits apply.
Pennsylvania	100%	100%	100%	Same as federal	100%
Rhode Island	None	None	None	Same as federal	None
South Carolina	Under 65: $3,000 Age 65+: $10,000 (see notes)	Under 65: $3,000 Age 65+: $10,000 (see notes)	Under 65: $3,000 Age 65+: $10,000 (see notes)	100%	Under 65: $3,000 Age 65+: $10,000 (see notes)
South Dakota	No income tax.
Tennessee	State income tax applies only to interest and dividends. Taxpayers age 65+ may exclude $16,200 single/$27,000 joint.
Texas	No income tax

Table 1: -Continued-

State	State/Local	Federal Civil Service	Military	Social Security	Private
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
Virginia	Age 62-64: $6,000 (Not available to those who turn age 62 after 1/1/04.)  Age 65+: $12,000 Dollar-for- dollar reduction for future beneficiaries if federal AGI, excluding SS, exceeds $50,000 single/$75,000 joint	Age 62-64: $6,000 (Not available to those who turn age 62 after 1/1/04.)  Age 65+: $12,000 Dollar-for- dollar reduction for future beneficiaries if federal AGI, excluding SS, exceeds $50,000 single/$75,000 joint	Age 62-64: $6,000 (Not available to those who turn age 62 after 1/1/04.)  Age 65+: $12,000 Dollar-for- dollar reduction for future beneficiaries if federal AGI, excluding SS, exceeds $50,000 single/$75,000 joint	100%	Age 62-64: $6,000 (Not available to those who turn age 62 after 1/1/04.) Age 65+: $12,000 Dollar-for- dollar reduction for future beneficiaries if federal AGI, excluding SS, exceeds $50,000 single/$75,000 joint
Washington	No income tax
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%; 100% for 2008 tax year and after	None
Wyoming	No income tax.

Source:  National Conference of State Legislatures, “State Personal Income Taxes on Pensions and Retirement Income: Tax Year 2007.”  July, 2007.

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.

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

Iowa: Exemption total excludes SS.

Kansas: For 2007 tax year, exemption total excludes SS for taxpayers with federal AGI under $50,000.  For 2008 and after, AGI maximum for SS exclusion is $75,000.

Michigan: Taxpayers age 65+ may subtract interest, dividends, and capital gains from AGI up a maximum for 2006 of $9,128 single/$18,255 joint. The subtraction must be reduced by the amount of any pension exclusion claimed.

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 single/$42,000 joint.

Missouri: Exemption for Social Security benefits, Social Security disability benefits, and benefits received from a nonprivate retirement system for individuals age 62+ to be phased in as follows: for 2007, 20%; 2008, 35%; 2009, 50%; 2010, 65%; 2011, 80%; and 2012 and thereafter, 100%. Maximum deduction is available for AGI up to $85,000 single/ $100,000 joint.  The exemption decreases dollar for dollar for AGIs exceeding that amount. If a taxpayer receives both Social Security and public retirement benefits, the maximum deduction for the publicly funded retirement benefits is decreased by $1 for every dollar of SS benefits received if the benefits are not included in taxpayer’s Missouri AGI. The maximum deduction for the publicly funded retirement benefits is limited to the maximum SS benefits available for the tax year less any SS benefits not taxable to Missouri.

New Jersey: Taxpayers over age 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. Exclusion eliminated for AGI over $50,000 single/$100,000 joint.

Ohio: A retirement income tax credit of up to $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: Exemption effective for 2005 tax year and after.

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 age 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.

JL:ts