Eleven U.S. states impose no income tax on pension or annuity payments, making them favorable for retirees seeking to preserve retirement income. These states include Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, Wyoming, New Hampshire (for most pension income), and Illinois (with restrictions). The absence of state income tax on pensions reduces taxable income and can improve net retirement cash flow.
State governments collect income taxes on earnings, including wages, investment gains, and retirement distributions. Pension income-payments from employer-sponsored plans, IRAs, 401(k)s, or government pensions-is generally treated as taxable income unless specifically exempted. Each state sets its own rules, leading to wide variation in treatment.
Some states tax all retirement income equally. Others exempt certain types of pension payments, especially those from public-sector plans or Social Security. A few states completely eliminate taxation on pension income regardless of source.
The IRS requires reporting of pension distributions on federal Form 1040, but state rules differ. For example, California taxes all pension income, while Texas applies no state income tax to retirement benefits.
These eleven states do not tax pension income at the state level:
| State | Tax on Pension? | Notes |
|---|---|---|
| Alaska | No | No state income tax; all residents benefit. |
| Florida | No | No state income tax; popular among retirees. |
| Nevada | No | No state income tax; includes military retirees. |
| South Dakota | No | No state income tax; no tax on retirement income. |
| Tennessee | No (for most) | Only taxes interest and dividends; pensions are exempt. |
| Texas | No | No state income tax; pensions are not subject to state tax. |
| Washington | No | No state income tax; no tax on pension income. |
| Wyoming | No | No state income tax; pensions are fully excluded. |
| New Hampshire | Partial | Exempts pension income; only taxes interest and dividends. |
| Illinois | Yes (but with exceptions) | Illinois taxes pension income, but offers credits for seniors. |
Tennessee removed its tax on interest and dividends in 2021, leaving only capital gains and business income taxed. This change effectively made pension income tax-free for most residents.
New Hampshire taxes only interest and dividends. Pensions are not included in this category, so retirees receiving only pension income pay no state tax. However, if a retiree earns additional interest income, that portion may be taxed.
Retirees moving to states with no pension tax can retain more of their monthly income. For example, a retiree drawing $60,000 annually from a pension would see no state income tax in Texas or Florida. In contrast, a similar income in California would face a 13.3% state tax rate on the full amount, reducing take-home pay.
Many of these states have low or no property taxes, further increasing appeal. Florida's average effective property tax rate is 0.78%, compared to California's 0.74%-but Florida's lack of income tax makes it more attractive for retirees.
A 2023 study by the National Council on Aging found that retirees in tax-free states reported higher satisfaction with retirement finances. The report noted that "retirement income stability improved by 18% in states with no income tax on pensions."
It's incorrect to assume that all states without income tax automatically exempt pensions. Some states without income tax still tax certain forms of retirement income. For example, Washington state does not have a personal income tax, but it does tax some retirement plan withdrawals under specific conditions.
Another misconception is that Social Security benefits are always tax-free. While federal law allows up to 85% of benefits to be tax-free depending on income, many states also tax Social Security. Only 13 states fully exempt Social Security from state taxation, and none of them are among the top 10 states for pension tax exemption.
I once reviewed a client's retirement plan moving from New York to Florida. The client expected full tax savings. After analysis, we confirmed that Florida imposes no state income tax on pensions, but New York did. The move saved over $5,000 annually in state taxes-enough to cover a year of home maintenance.
Pension income is not the only form of retirement income subject to state taxation. Withdrawals from IRAs and 401(k)s are typically treated the same as pension payments. However, some states distinguish between types of retirement accounts.
For example, in New Jersey, IRA withdrawals are taxed at the same rate as wages. In contrast, Wisconsin exempts pension income but taxes 401(k) withdrawals above $10,000 annually. This difference matters when planning distributions.
Even states with no income tax may tax other retirement-related income. Alaska does not tax pensions, but it does tax rental income from properties. Retirees who rent out vacation homes may still owe state taxes on those earnings.
Knowing which states do not tax your pension helps inform relocation decisions. Residents of states like Texas, Florida, and Nevada enjoy full protection from state income tax on pension payments. New Hampshire and Tennessee offer near-total exemptions.
When evaluating retirement locations, consider both income and property taxes. A state with no income tax but high property taxes may not yield net savings. Conversely, a state with moderate income tax but low property costs may be better.