Which States Do Not Tax Pension Income?

Why is it that some states attract higher populations of senior citizens and retirees than others? A warmer climate is the first answer that comes to mind for this question, but that is not always the case. When it comes to formulating a comfortable budget for their golden ages, taxation should be carefully considered by those who are planning for their retirement. To this effect, the following states offer a significant tax break in the sense that they do not tax military, state, and federal pensions; plus, they do not tax Social Security retirement benefits:

* Alabama
* Illinois
* Louisiana
* Massachusetts
* Michigan
* Mississippi
* New York
* Pennsylvania
* Hawaii

Under certain conditions, Alabama, Illinois and Hawaii may also offer tax exemptions on private pensions, but this is mostly an exception and not a rule.

Although the following states do not specifically offer tax breaks on pensions, they lack income taxes, a situation that makes them ideal for retirees:

* Alaska
* Florida
* Nevada
* South Dakota
* Texas
* Washington
* Wyoming

Of the states above, Florida tends to be preferred by many seniors despite its high property tax, which can be offset by means of a homestead exemption or by choosing to pay rent; this may explain the concentration of senior communities that feature lease or lease-to-own living arrangements.

Georgia is also attractive to seniors since it offers a generous annual exclusion on pension income up to $65K for a single taxpayer or $130K for joint filers. Kentucky is another state that presents an advantage in the sense that its residents enjoy a reasonable cost of living plus a tax exemption on pension income tax up to $41K per year. Likewise, Tennessee offers a pension tax break up to $33K for residents who are 65 years of age or older.

In the case of Massachusetts, retirees enjoy a reciprocity rule: Seniors who come from states that honor the pension tax break of the Old Colony will be able to exempt taxes from their pensions when they move to the Bay State by means of a special certification. Those who choose to work a little longer during their golden years may benefit by relocating to Maine or Virginia, where the local and state tax rates are only five percent. This tax combination is even lower in Hawaii, but the cost of living tends to be higher.