This article takes a look at the 20 states with the highest taxes on retirement income in the US. If you wish to skip our detailed analysis on the tax reality in the US, you may go to 5 States with the Highest Taxes on Retirement Income in the US.
The Tax Reality for Retirees: What You Need to Know
For many, retirement denotes a period of relaxation and enjoyment, with taxes probably the last thing on one’s mind. However, many individuals do not know they still have to pay them on their retirement income, including their Social Security checks. That’s right, older Americans who earn above a certain income level owe federal income taxes on their benefits. While this may come out as a surprise for some, many retirees who know that they owe taxes on their retirement income are often taken aback by the number they are obligated to pay. This is especially true for individuals who don’t work with a financial advisor. These people often end up withdrawing money from their retirement savings to cover the shortfall. Ironically, they also have to pay taxes on the money they withdraw.
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According to the Social Security Administration, 40% of individuals who receive Social Security pay federal income taxes on their benefits. This is often true when retirees have some other form of substantial income that they receive in addition to their benefits, such as wages, interests, dividends, and other taxable income. As per Internal Revenue Service (IRS) rules, an individual has to pay taxes on up to 50% of their Social Security benefits if they have a combined income between $25,000 and $34,000. For those with a combined income of higher than $34,000, up to 85% of benefits may be taxable.
For those who view federal tax cuts as unfavorable, it might be disheartening to discover that their state could also be taxing their Social Security benefits. As of 2024, 10 states still tax Social Security benefits to an extent. Some of these states follow the same tax rules as the federal government, while many others offer deductions or exemptions based on factors such as age or income. California is one of the most heavily taxed states in the US, but it doesn’t tax Social Security benefits. However, other forms of retirement income are considered taxable in the state. Retirees may have to pay an income tax on their retirement income as high as 13.3%. Yet many other states don’t tax retirement income at all, such as Mississippi and Florida. These states don’t have an income tax, which is why they are some of the best states for retirement income.
While taxes on retirement income are an important aspect to be discussed for retirees, other taxes form an important part of the equation as well. According to H&R Block, Inc. (NYSE:HRB), even if individuals don’t pay taxes on their retirement income, they are still subject to local taxes, property taxes, and sales taxes. H&R Block, Inc. is an American tax preparation company operating in Canada, the United States, and Australia. Retirees can use such tax filing services for tax preparation. They can also take help from accountants who can advise on income tax returns, refunds, and more.
H&R Block, Inc. (NYSE:HRB) reported its Q4 Fiscal 2024 results in August, 20024. The company achieved notable financial growth, with revenue, EBITDA, and EPS increasing significantly. Key drivers included strong performance in the DIY segment, particularly in the AI-powered Tax Pro Review product and AI Tax Assist, leading to higher client conversions and customer satisfaction. The Assisted segment also performed well, attracting higher-value clients and maintaining positive trends in small business tax services. The outlook for FY ‘25 is positive, with expectations for continued revenue, EBITDA, and EPS growth.
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Methodology
To compile the list of states with the highest income taxes on retirement income, we first identified how each state taxes Social Security benefits, pensions, and income from 401(k) and other retirement accounts. States were then grouped into three categories: those that tax all three income sources, those that tax two, and those that tax only one. States that taxed all three sources were ranked the highest, receiving the lowest scores. Within each category, states were further ranked according to their overall income tax rate. Please note that while our methodology identifies states with the highest income taxes on retirement income based on these specific criteria, other states may have higher taxes when considering different factors. The results are tailored to our chosen methodology.
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Here are the states with the highest taxes on retirement income in the US:
20. Indiana
Social Security: Not Taxable
Pensions: Taxable
401(k) and IRA Distributions: Taxable
Indiana doesn’t tax Social Security retirement benefits. However, other forms of retirement income are taxed at a flat tax rate of 3.05%.
19. Arkansas
Social Security: Not Taxable
Pensions: Taxable (Except military pensions and railroad retirement benefits)
401(k) and IRA Distributions: Taxable
Except for Social Security, most types of retirement income are taxed in Arkansas at a low of 0% and a high of 4.4%. Taxpayers who are 59.5 or older can deduct up to $6,000 of eligible retirement income from their taxable income.
18. California
Social Security: Not Taxable
Pensions: Taxable
401(k) and IRA Distributions: Taxable
One of the most heavily taxed states in the US is California. Similar to Arkansas, the state doesn’t tax Social Security. Other forms of retirement income, such as money withdrawn from pensions, 401(k)s, 403(b)s, and IRAs are combined and taxed as regular income. Tax rates run from 1% to 13.3%.
17. New Mexico
Social Security: Taxable
Pensions: Partially Taxable
401(k) and IRA Distributions: Partially Taxable
New Mexico’s income tax rates range from 1.7% to 5.9%. However, seniors 65 or older can exclude retirement income of up to $8,000 based on their filing status and federal-adjusted gross income.
16. Nebraska
Social Security: Not Taxable
Pensions: Taxable (Except military retirement pay)
401(k) and IRA Distributions: Taxable
Besides Social Security and military retirement pay, retirement income is taxed in Nebraska at a low of 2.46% and a high of 5.84%.
15. Ohio
Social Security: Not Taxable
Pensions: Taxable
401(k) and IRA Distributions: Taxable
Ohio taxes retirement income at a low of 2.75% and a high of 3.5%. Social Security benefits are not taxed in the state, but pensions and income from IRA and 401(k)s is taxable. Ohio ranks 15th on our list of states with the highest taxes on retirement income in the US.
14. Virginia
Social Security: Not Taxable
Pensions: Taxable
401(k) and IRA Distributions: Taxable
While Virginia taxes most retirement income, retirees aged 65 and older may qualify for a deduction of up to $12,000.
13. West Virginia
Social Security: Not taxable
Pensions: Taxable (exclusions apply)
401(k) and IRA Distributions: Taxable
Most retirement income is subject to tax in West Virginia at a low of 2.36% and a high of 5.12%.
12. Vermont
Social Security: Partially Taxable
Pensions: Partially Taxable
401(k) and IRA Distributions: Taxable
In Vermont, most forms of retirement income are taxed at rates ranging from 3.35% to 8.75%. Even Social Security is taxed in the state. However, those Social Security recipients with an AGI of $65,000 or less (if married filing jointly) may qualify for an exemption. According to Vermont’s official Government website, for all other filing statuses, the Vermont exemption applies in full to an AGI up to $50,000. The state offers a deduction of up to $10,000 for some types of retirement income. Only federal railroad retirement benefits are exempt from taxes in the state.
11. Rhode Island
Social Security: Partially Taxable
Pensions: Partially Taxable
401(k) and IRA Distributions: 401(k) distributions (partially taxable) and IRA distributions (fully taxable)
Rhode Island is one of the few states that still tax Social Security. However, this only applies to taxpayers whose income surpasses specific limits. Income from military pensions is tax-exempt. State income tax rates range from 3.75 % to 5.99 %, landing it on the 11th place on our list of states with the highest taxes on retirement income in the US.
10. New York
Social Security: Not Taxable
Pensions: Taxable (with exceptions)
401(k) and IRA Distributions: Taxable
Social Security retirement benefits aren’t taxed in New York. However, most retirement income is. Taxpayers 59.5 years or older may qualify for a deduction of up to $20,000 of qualified retirement income.
9. Colorado
Social Security: Partially Taxable for some retirees (fully deductible for taxpayers 65 and older)
Pensions: Partially Taxable
401(k) and IRA Distributions: Taxable
Another state that still taxes Social Security retirement benefits is Colorado. However, some retirees don’t have to pay. Colorado allows a retirement income deduction of $20,000 per year for individuals aged 55 to 64 and $24,000 per year for those aged 65 and older. The same deduction applies to income from pensions and distributions from IRA and 401(k). Other retirement income is taxed at a flat rate of 4.4%.
8. North Carolina
Social Security: Not Taxable
Pensions: Taxable
401(k) and IRA Distributions: Taxable
Most types of retirement income is taxed in North Carolina at a flat tax rate of 4.5%. This income tax rate is set to decrease gradually until it reaches 3.99%.
7. Wisconsin
Social Security: Not Taxable
Pensions: Taxable
401(k) and IRA Distributions: Taxable
The state of Wisconsin doesn’t tax Social Security retirement benefits. Taxpayers aged 65 and older don’t have to pay tax on income from federal, local, or state retirement plans (including military retirement benefits). Other types of retirement income are taxed low of 3.5% and a high of 7.65%.
6. Oregon
Social Security: Not Taxable
Pensions: Taxable
401(k) and IRA Distributions: Taxable
When compared to other states, Oregon’s income tax brackets are high. The rates run at a low of 4.75% and a high of 9.9%. While most types of retirement income is taxed in the state, taxpayers may benefit from several other retirement tax policies.
5. Massachusetts
Social Security: Not Taxable
Pensions: Taxable (with exemptions)
401(k) and IRA Distributions: Taxable
In Massachusetts, income from an IRA, 401(k), 403(b), or any other type of retirement savings account is taxed at a flat rate of 5%. Moreover, income exceeding $1 million is subject to an extra 4% tax.
4. Kansas
Social Security: Partially Taxable
Pensions: Taxable (except public pensions)
401(k) and IRA Distributions: Taxable
In Kansas, retirement income from pensions, 401(k)s, or IRAs is fully taxable at a low of 3.1% to a high of 5.7%. Social Security retirement benefits are taxable for taxpayers with an AGI over $75,000. Public pension income is fully exempt from taxation in the state.
3. Utah
Social Security: Taxable
Pensions: Taxable
401(k) and IRA Distributions: Taxable
Utah has a flat income tax rate of 4.65%. Most forms of retirement income, including Social Security retirement benefits, are taxed in the state. Utah Gov. Spencer Cox recently signed into law a bill to lower the state’s income tax rate from 4.65% to 4.55%.
2. Montana
Social Security: Taxable (Partially deductible)
Pensions: Taxable
401(k) and IRA Distributions: Taxable
All three types of retirement income are taxed in the state of Montana. Retirees can deduct up to $5,500 of qualified retirement income. The income tax rate runs at a low of 4.7% and a high of 5.9%.
1. Minnesota
Social Security: Partially Taxable
Pensions: Taxable
401(k) and IRA Distributions: Taxable
Most types of retirement income are taxed in the state of Minnesota. Even Social Security may be partially taxable. According to AARP, taxpayers with taxable income up to $78,000, or $100,000 for a couple, are exempt from paying state taxes on their benefits. Those who earn more than these amounts may qualify for a partial tax break. The state has a graduated state individual income tax, with rates ranging from 5.35% to 9.8%. Making it to the top of our list of states with the highest taxes on retirement income in the US, even the lowest income tax bracket is higher when compared to many other states in the country.
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Disclosure: None. This article was originally published on Insider Monkey.