State Taxes on Retirement Income

The tax bill you forget about. Everything else in this section is about your federal taxes — brackets, the tax torpedo, IRMAA, RMDs. But most retirees face a second tax system on the same income, and it's wildly inconsistent from state to state. One retiree pays nothing on a $90,000 income; an identical retiree across a state line pays several thousand dollars a year on it. Over a 20- or 30-year retirement, the difference can run into six figures. Because state rules also differ by type of income — Social Security vs. pension vs. IRA withdrawal vs. capital gain — you can't reason about it in the abstract; you have to look up how your specific state treats each stream.

The nine no-income-tax states. Nine states impose no broad personal income tax: Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming. In these, every kind of retirement income — Social Security, pensions, IRA and 401(k) distributions, even wages from a part-time job — escapes state income tax entirely. Two footnotes: New Hampshire historically taxed interest and dividends, but that tax has now been repealed; and Washington added a 7% tax on very large capital gains (over ~$262,000 in 2026) that specifically exempts retirement accounts and home sales. The catch is that there's no free lunch — states with no income tax usually lean harder on property and sales taxes (Texas and Washington have notably high property taxes), so judge the total burden, not the headline.

Social Security: taxed federally, mostly spared by states. Up to 85% of your Social Security can be taxable at the federal level (Chapter 11), but the great majority of states leave it alone. Only eight tax any Social Security in 2026 — Colorado, Connecticut, Minnesota, Montana, New Mexico, Rhode Island, Utah, and Vermont — and even those mostly exempt lower- and middle-income retirees through income thresholds. The list has been shrinking (Kansas and West Virginia recently dropped off). For most people, in most states, Social Security is state-tax-free.

Pensions and account withdrawals: where states diverge most. This is the category with the biggest spread. At one end, four states with an income tax fully exempt qualified retirement income: Illinois, Iowa, Mississippi, and Pennsylvania — a retiree living on Social Security, a pension, and IRA withdrawals can owe zero state income tax. Michigan completed a multi-year phase-out in 2026, and now shelters roughly the first $65,000 of retirement income for a single filer (about $131,000 for a couple). Many other states carve out only public or military pensions while fully taxing private pensions and IRA/401(k) draws; still others tax all of it at their ordinary rates. The practical lesson: your state's treatment of a government pension tells you nothing about how it treats your IRA — check each income type separately.

The HSA's state asterisk. The Health Savings Account (Chapter 4) is the rare account that's tax-free at every step — but that triple advantage is a federal one, and two states don't honor it: California and New Jersey. Both treat an HSA like an ordinary taxable brokerage account. You get no state deduction for contributions (California goes further and counts your employer's HSA contributions as taxable state wages), and the account is treated like a plain taxable brokerage: its interest and dividends are taxed on your state return every year, and capital gains are taxed when you realize them (a sale or the fund's own gains distributions) — the tax-free growth simply doesn't exist at the state level. One practical wrinkle: because the account is federally sheltered, your HSA custodian issues no 1099 for this activity and reports nothing to the state, so you have to pull the numbers off your statements and self-report them (California puts them on Schedule CA and Schedule D) — a step many residents miss. The saving grace is the other end: because the money was already taxed going in and along the way, neither state taxes HSA withdrawals — qualified medical distributions come out state-tax-free, and there's no state penalty on non-qualified ones (the federal 20% penalty before age 65 still applies). So in California or New Jersey the HSA is a "double," not a "triple," tax advantage: still worth funding for the federal breaks, but hold tax-efficient investments inside it to keep the annual state bill low. Every other state — and the nine with no income tax — follows the federal rules and leaves the HSA fully tax-free. New Hampshire and Tennessee once reached HSA interest and dividends through their investment-income taxes, but both of those levies have since been repealed, so as of 2026 only California and New Jersey remain.

The state estate-tax trap. The federal estate tax is a non-issue for nearly everyone, with its $15 million per-person exemption (Chapter 28). But about 17 states plus the District of Columbia impose their own estate or inheritance tax, and their exemptions can be dramatically lower — Oregon at $1 million (the lowest), Massachusetts at $2 million, Washington around $2.2 million. That's low enough to catch an ordinary house-plus-retirement-accounts estate that the federal tax would never touch. Five states (Kentucky, Maryland, Nebraska, New Jersey, Pennsylvania) tax the heir instead through an inheritance tax; Maryland has both. And unlike the federal system, most of these states offer no spousal portability, so a married couple has to plan deliberately to use both exemptions rather than lose one. If you have a sizable estate, the state you die in can matter far more than the IRS.

Moving for taxes — the right way. Relocation is the biggest lever of all, and federal law makes it work cleanly: under the Source Tax Act of 1996, a state cannot tax the pension or retirement-account income of someone who no longer lives there. So moving from a high-tax state to a no-tax one genuinely escapes your old state's reach on that income — this isn't a loophole, it's the law. But you have to actually change your domicile, not just buy a condo: spend the days (many states use a 183-day test), move your driver's license and voter registration, update your estate documents, and shift the center of your financial and personal life. High-tax states are known to audit departing residents and will look hard at whether you really left. And weigh the whole picture before you uproot: property and sales taxes, cost of living, healthcare access, and — usually most important — proximity to family and the life you want. Don't let the tax tail wag the dog.