State Tax Treatment of Civil Service Annuities

Chapter 14: Section 4

State Provisions and Exemptions

The following states have no personal income tax: Alaska, Florida, Nevada, New Hampshire,* South Dakota, Tennessee,* Texas, Washington, and Wyoming. (*Tax is imposed on interest and dividend income.)

The following states exempt the total amount of the taxable portion of civil service annuities: Alabama, Hawaii, Illinois, Kansas, Louisiana, Massachusetts, Michigan, Mississippi, New York, and Pennsylvania. Wisconsin does not tax annuities of federal employees who were retired before January 1, 1964, or who were employed by the government and covered by one of the retirement systems as of December 31, 1963, and retired at a later date. North Carolina has not taxed annuities since 1998 if an individual has five years of government service as of August 12, 1989.

Limitations on State Taxation of Pensions

All states and their subdivisions, the District of Columbia, and the possessions of the United States are prohibited from imposing income tax on any retirement income of any individual who is not a resident of or domiciled in the state.

While states may no longer impose these “source” taxes, retirement income remains taxable within the state in which the taxpayer resides.

Taxpayers who have excluded retirement income from resident state taxation because it was taxable in another state or who have received a credit against resident state income tax because of taxes paid on retirement income to another state are no longer entitled to the exclusion or the credit.

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