Americans are living longer. On average men can expect to live to age 84 and women can expect to live to age 86, according to Social Security Administration statistics. The statistics also show that one in four 65-year-olds will live to be 90 and one in ten will reach age 95. Currently, there are 49 million Americans over the age or 65; that is predicted to rise to over 79 million by the year 2035. Everyone should plan for the longer life expectancy.
Many workers are covered by Social Security, and others have IRAs, 401(k) plans, Employee Stock Ownership Plans, and other similar savings. However, many Americans will not be financially prepared for retirement. The SSA estimates that 46 percent of private industry workers do not have private pension coverage, and 39 percent of workers report not having personal savings for retirement. Every year lists are published suggesting that some states are better for retirees than other. How do states address retirement income tax-wise?
Colorado allows taxpayers age 65 and older to subtract pension and annuity income up to $24,000 a year. Taxpayers under the age of 65 can subtract up to $20,000. Income from a railroad retirement annuity can be deducted without limitations.
In Georgia, taxpayers age 62 or older, or permanently and totally disabled at any age, may be eligible for a retirement income adjustment. Retirement income includes pensions, annuities, interest and dividend income, capital gains, royalties, net income from rental property, and a maximum of $4,000 of earned income.
Hawaii does not tax state or public retirement system benefits or qualifying distributions from an employer-funded pension plan. Qualifying plans include payments due to retirement, disability, or death.
Iowa taxpayers age 55 years and older can subtract $6,000 (or $12,000 for married couples) in retirement plan distributions or survivor benefits received, including pension payments.
Pensions, including federal pensions, received by Minnesota residents are taxable no matter where the pension was earned. However, Minnesota does allow a subtraction for any military service pension or railroad retirement income, if included in federal taxable income.
New Jersey offers several retirement income exclusions. The pension exclusion can be taken by taxpayers 62 years or older and disabled taxpayers if their total income for the year was $100,000 or less. The other retirement income exclusions allow exclusion of other types of income (e.g., wages, interest, and dividends) from total income. Additionally, military pensions and survivor’s benefits are not taxable. Military pensions result from service in the Army, Navy, Air Force, Marine Corps, or Coast Guard.
Most retirement income is subject to tax when received by an Oregon resident, even if the income was earned as a nonresident. Oregon offers a credit to taxpayers who are age 62 or older as of Dec. 31, 2017, who receive any of the following types of retirement income: U.S. government pensions (including military), state or local government pensions, employee pensions, individual retirement plans, deferred compensation plans, or employee annuity plans.
Tennessee's income tax is limited to interest and dividends. Earnings or distributions from traditional IRAs and Roth IRAs are not taxable.
Distributions from certain federal, state and local pension plans are exempt from West Virginia income tax. If included in federal AGI, taxpayers can subtract railroad retirement benefits and West Virginia state police or local police and firemen’s retirement income. There is also a subtraction of up to $20,000 of military retirement income.
Continue the discussion on Bloomberg BNA’s State Tax Group on LinkedIn: What other ways do states help retirees tax-wise?
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