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CCH can assist you with stories, including interviews with CCH subject experts. Also, the 2013
CCH Whole Ball of Tax
is available in print. Please contact:
 
Leslie Bonacum
(847) 267-7153
mediahelp@cch.com
 
Eric Scott
(847) 267-2179
eric.scott@wolterskluwer.com
 
Brenda Au
(847) 267-2046
brenda.au@wolterskluwer.com

Visit the CCH Whole Ball of Tax site often as new releases and other updates will be posted
throughout the tax season.

CCH provides special CCH Tax Briefings on key topics at CCHGroup.com/Legislation.

 
2013 CCH Whole Ball of Tax
Release (10) | Back to WBOT

2013 CCH Whole Ball of Tax

Contact:
Leslie Bonacum
, 847-267-7153, mediahelp@cch.com
Eric Scott , 847-267-2179, eric.scott@wolterskluwer.com
Brenda Au , 847-267-2046, brenda.au@wolterskluwer.com

Location, Location, Location: Where You Retire Can Have a Taxing Effect

CCH Looks at Tax Considerations for Different Options

(RIVERWOODS, ILL., January 2013) – Over the past few years, property prices have plummeted in many areas, but the same can’t be said for taxes, and now both real estate and taxes may be on the rise, according to CCH, a Wolters Kluwer business and a leading global provider of tax, accounting and audit information, software and services (CCHGroup.com).

“There are a lot of factors to consider in deciding where to retire and what’s going to be affordable,” said CCH State Tax Analyst Kathleen Thies, JD. “The different types of taxes you may need to pay are among the costs to look at.”

Taxes that seniors should consider when evaluating the financial implications of where they may want to call home in retirement include:

  • State taxes on retirement benefits;
  • State income tax rates;
  • State and local sales tax;
  • State and local property taxes; and
  • State estate taxes.

Below CCH reviews each of these.

Taxability of Retirement Benefits Varies State to State

Seven states do not tax individual income – retirement or otherwise: Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming. Two other states – New Hampshire and Tennessee – impose income taxes only on dividends and interest (5 percent for New Hampshire and 6 percent for Tennessee for 2012 and remain the same in 2013).

In the other 41 states and the District of Columbia, tax treatment of retirement benefits varies widely. For example, some states exempt all pension income or all Social Security income. Other states provide only partial exemption and some tax all retirement income.

States exempting pension income entirely for individuals age 65 or older are Pennsylvania and Mississippi. States exempting a portion of pension income include: Alabama, Arkansas, Colorado, Delaware, Georgia, Hawaii, Illinois, Iowa, Kentucky, Louisiana, Maine, Maryland, Michigan, Missouri, Montana, New Jersey, New Mexico, New York, North Carolina, Ohio, Oklahoma, Oregon, South Carolina, Utah, Virginia, and West Virginia. States generally taxing pension income include: Arizona, California, Connecticut, District of Columbia, Idaho, Indiana, Kansas, Massachusetts, Minnesota, Nebraska, North Dakota, Rhode Island, Vermont, and Wisconsin. (See chart below for additional detail.)

Among states announcing changes to income tax for retirement plans in 2012 include:

  • Georgia: The personal income retirement exclusion amount has been capped at $65,000 for taxpayers 65 years of age or older and $35,000 for certain taxpayers between ages 62 and 65 – for tax years beginning on or after January 1, 2012.
  • Kentucky: At the end of 2012, The Kentucky Blue Ribbon Commission on Tax Reform proposed a reduction in the individual income tax pension exclusion from $41,110 to $30,000 and implemented a dollar-for-dollar phase out for income over $30,000.
  • Maine: In 2012, a law was enacted to limit the income tax deduction for certain retirement benefits for tax years beginning after 2013. This raises the deduction from $6,000 to $10,000 (reduced by the total amount of the taxpayer’s Social Security benefits and Federal Railroad Retirement benefits). The deduction is also expanded to include all federally taxable pension income, annuity income and individual retirement account (IRA) distributions, except pick-up contributions for which a deduction has been allowed.
  • Michigan: The deduction for pension benefits for senior citizens is curtailed based on the taxpayer’s birth year and household resources. Currently, this deduction is limited by a dollar amount, but no other limitation applies. Specifically, for persons born before 1946, the deduction for pension benefits is unchanged (see chart below). However, for persons born in 1946 through 1952, the deduction for pension benefits is limited to $20,000 for a single return and $40,000 for a joint return. And after that person reaches age 67, the pension benefits deduction is no longer applicable, but the taxpayer is eligible for a deduction of $20,000 for a single return and $40,000 for a joint return against all types of income. A third set of options is available for taxpayers born after 1952, when they reach age 67.

While some states tax pension benefits, only 14 states impose tax on Social Security income: Colorado, Connecticut, Iowa, Kansas, Minnesota, Missouri, Montana, Nebraska, New Mexico, North Dakota, Rhode Island, Utah, Vermont and West Virginia. These states either tax Social Security income to the same extent that the federal government does or provide breaks for Social Security income, often for lower-income individuals.

See chart below for full detail on Taxation of Retirement Income.

State Income, Property, Sales Taxes Can Add Up

In addition to state taxes on retirement benefits, other taxes that seniors should consider when evaluating the financial implications of where they may to retire include:

  • State income tax rates. For example, income tax rates also can have a significant financial impact on retirees in determining where they want to live and can vary widely across the country.
  • “As some retirees will face higher federal income taxes, they may look more closely at states with lower or no income tax rates as one way to help offset their overall tax obligation,” said Thies.

    While seven states have no income tax and two tax only interest and dividend income, several have a relatively low income tax rate across all income levels. For example, the highest marginal income tax rates in Arizona, New Mexico and North Dakota are below 5 percent. Some states have a relatively low flat tax regardless of income, with the three lowest: Indiana (3.4 percent), North Dakota (3.99 percent) and Pennsylvania (3.07 percent) for 2013.

  • State and local sales taxes. Forty-five states and the District of Columbia impose a state sales and use tax (only Alaska, Delaware, Montana, New Hampshire and Oregon do not impose a state sales and use tax). States with a state sales tax rate of 7 percent include Rhode Island, Indiana, Mississippi, New Jersey and Tennessee. California has a state sales tax rate of 7.5 percent. Local sales and use taxes, imposed by cities, counties and other special taxing jurisdictions, such as fire protection and library districts, also can add significantly to the rate.
  • State and local property taxes. While property values have declined over recent years in many areas, that has not necessarily been the case for property taxes. However, many states and some local jurisdictions offer senior citizen homeowners some form of property tax exemption, credit, abatement, tax deferral, refund or other benefits. These tax breaks also are available to renters in some jurisdictions. The benefits typically have qualifying restrictions that include age and income of the beneficiary.
  • State estate taxes. Estate taxes also can influence where seniors want to retire. Rules vary from state to state as well as from federal estate tax laws. For example, 18 states impose a tax on estates valued below the $5.25 million federal threshold for 2013 ($5.12 million for 2012); only Delaware, Hawaii and North Carolina use the federal exclusionary amount.

Although several states do not collect estate taxes, many still have estate tax laws on their books. For example, Texas does not currently collect estate taxes from residents, but its estate tax is still in its state Tax Code. Of the 29 states that do not collect estate taxes, 26, including Texas, are tied to the federal estate tax state death tax credit – meaning estate tax statutes remain in their Tax Codes. Only three states that do not collect estate taxes, Arizona, Kansas and Oklahoma, have actually repealed the estate tax from their Tax Codes and statutes.

“The American Taxpayer Relief Act of 2012 brings more clarity on the federal level that only estates above the $5 million mark indexed for inflation will be subject to the federal estate tax,” said CCH Estate Planning Analyst James C. Walschlager, MA. “However, the threshold in some states can be below $1 million for state estate taxes, which can impose additional planning challenges.”

For more information on estate tax issues, see Release 8.

About CCH, a Wolters Kluwer business

CCH, a Wolters Kluwer business (CCHGroup.com) is a leading global provider of tax, accounting and audit information, software and services. Celebrating its 100th anniversary in 2013, CCH has served tax, accounting and business professionals since 1913. Among its market-leading solutions are the ProSystem fx® Suite, CCH Integrator™, CCH® IntelliConnect®, Accounting Research Manager® and the U.S. Master Tax Guide®. CCH is based in Riverwoods, Ill. Follow us on Twitter @CCHMediaHelp. Wolters Kluwer (www.wolterskluwer.com) is a market-leading global information services company. Wolters Kluwer is headquartered in Alphen aan den Rijn, the Netherlands. Its shares are quoted on Euronext Amsterdam (WKL) and are included in the AEX and Euronext 100 indices.

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State Taxation of Retirement Income

The following chart shows generally which states tax retirement income, including Social Security and pension income for the 2012 tax year unless otherwise noted. States shaded indicate they do not tax these forms of retirement income.

State

State Tax of Social Security Income

State Tax of Pension Income

Alabama

Not taxed

Certain pension income not taxed

Alaska

No individual income tax

No individual income tax

Arizona

Not taxed

Generally taxable

Arkansas

Not taxed

Exempt to certain level

California

Not taxed

Generally taxable

Colorado

Exempt to a certain level

Exempt to a certain level; age restrictions apply

Connecticut

Exemption based on adjusted gross income (AGI)

Generally taxable

Delaware

Not taxed

Exempt to a certain level; age restrictions apply

District of Columbia

Not taxed

Generally taxable

Florida

No individual income tax

No individual income tax

Georgia

Not taxed

Exempt to a certain level; age restrictions apply

Hawaii

Not taxed

Distributions are partially exempt

Idaho

Not taxed

Generally taxable

Illinois

Not taxed

All income from federally qualified pension plans are generally exempt

Indiana

Not taxed

Generally taxable

Iowa

Exempt to a certain level

Exempt to a certain level; age restrictions apply

Kansas

Exemption based on AGI

Generally taxable

Kentucky

Not taxed

Exempt to a certain level

Louisiana

Not taxed

Exempt to a certain level; age restrictions apply

Maine

Not taxed

Exempt to a certain level, excluding IRA and SEP distributions

Maryland

Not taxed

Exempt to a certain level; age restrictions apply

Massachusetts

Not taxed

Generally taxable

Michigan

Not taxed

Exempt to a certain level, excluding certain 401(k) and 403(b) distributions

Minnesota

Taxed

Generally taxable

Mississippi

Exempt in total

Not taxed

Missouri

Exemption based on AGI

Exempt to a certain level; income restrictions apply

Montana

Exemption based on AGI

Exempt to a certain level; income restrictions apply

Nebraska

Taxed

Generally taxable

Nevada

No individual income tax

No individual income tax

New Hampshire

Only dividends and interest are taxable

Only dividends and interest are taxable

New Jersey

Social Security excluded from gross income

Exempt to a certain level; age and income restrictions apply

New Mexico

Taxed

Exempt to a certain level; age and income restrictions apply

New York

Not taxed

Exempt to a certain level; age restrictions apply

North Carolina

Not taxed

Exempt to a certain level

North Dakota

Taxed

Generally taxable

Ohio

Not taxed

Credit for pension distribution or income allowed; age restrictions apply

Oklahoma

Not taxed

Exempt to a certain level; age restrictions apply

Oregon

Not taxed

Credit for pension distribution or income allowed; age restrictions apply

Pennsylvania

Not taxed

Not taxed; age restrictions apply

Rhode Island

Taxed

Generally taxable

South Carolina

Not taxed

Exempt to a certain level; age restrictions apply

South Dakota

No individual income tax

No individual income tax

Tennessee

Only dividends and interest are taxable

Only dividends and interest are taxable

Texas

No individual income tax

No individual income tax

Utah

Exemption based on AGI

Exempt to a certain level; age and income restrictions apply

Vermont

Taxed

Generally taxable

Virginia

Not taxed

Exempt to a certain level; age and income restrictions apply

Washington

No individual income tax

No individual income tax

West Virginia

Taxed

Generally taxable

Wisconsin

Not taxed

Generally taxable

Wyoming

No individual income tax

No individual income tax

 

State Tax Treatment of Social Security, Pension Income

The following CCH analysis provides a general overview of how states treat income from Social Security and pensions for the 2012 tax year unless otherwise noted. States shaded indicate they do not tax these forms of retirement income.

State

Social Security Income

Pension Income

Alabama

State computation not based on federal. Social Security benefits excluded from taxable income.

Individual taxpayer’s pension income from retirement pay from a qualified pension or an IRC Sec. 414(j) defined benefit plan is not taxed.

Alaska

No individual income tax.

No individual income tax.

Arizona

Social Security benefits subtracted from federal AGI.

Individual taxpayer’s pension income is generally taxable.

Arkansas

State computation not based on federal. Social Security benefits excluded from taxable income.

Up to $6,000 total in retirement pay benefits and benefits received from an individual retirement account (IRA) is exempt.

California

Social Security benefits subtracted from federal AGI.

Individual taxpayer’s pension income is generally taxable.

Colorado

Pension income, including Social Security benefits, up to $24,000 may be subtracted from federal taxable income by those 65 and older, and up to $20,000 by those 55 and older or those who are second-party beneficiaries of someone 55 or older.

An individual taxpayer 55 through 64 years old can exclude up to $20,000 ($24,000 for a taxpayer aged 65 or older) in pension and annuity income.

Connecticut

Joint filers and heads of households with AGIs under $60,000 and individuals with AGIs under $50,000 deduct from federal AGI all Social Security income included for federal income tax purposes. Joint filers and heads of households with AGIs over $60,000 and individuals with AGIs over $50,000 deduct the difference between the amount of Social Security benefits included for federal income tax purposes and the lesser of 25 percent of Social Security benefits received or 25 percent of the excess of the taxpayer’s provisional income in excess of the specified base amount under IRC Sec. 86(b)(1).

Individual taxpayer’s pension income is generally taxable.

Delaware

Social Security benefits subtracted from federal AGI.

An individual taxpayer younger than 60 may deduct pension amounts of up to $2,000, and a taxpayer 60 or older may deduct up to $12,500. Eligible amounts for a taxpayer 60 or older include retirement income (dividends, capital gains realization, interest and rental income).

District of Columbia

Social Security benefits subtracted from federal AGI.

Individual taxpayer’s pension income is generally taxable.

Florida

No individual income tax.

No individual income tax.

Georgia

Social Security benefits subtracted from federal AGI.

An individual taxpayer age 62 to 64 may exclude up to $35,000 of retirement income; up to $4,000 of the maximum exclusion amount may be earned income. An individual 65 or older may exclude up to $65,000. 

Hawaii

Social Security benefits subtracted from federal AGI.

Distributions derived from employer contributions to pensions and profit-sharing plans are exempt.

Idaho

Social Security benefits subtracted from federal AGI.

Individual taxpayer’s pension income is generally taxable.

Illinois

Social Security benefits subtracted from federal AGI.

Income from a federally qualified retirement plan and an IRA, as well as retirement payments to a retired partner, are excluded.

Indiana

Social Security benefits subtracted from federal AGI.

Individual taxpayer’s pension income is generally taxable.

Iowa

Subtraction allowed for 77 percent of federally taxable benefits for tax year 2012, and 89 percent in 2013. For tax years after 2013, Social Security benefits are fully exempt.

Married taxpayers age 55 or older filing a joint return may exclude up to $12,000 ($6,000 for an unmarried taxpayer) of pension benefits and other retirement pay. A special rule applies to a spouse filing separately.

Kansas

For 2012 and thereafter, taxpayers with a federal AGI of $75,000 or less are exempt from any state tax on their Social Security benefits.

Individual taxpayer’s pension income is generally taxable.

Kentucky

Social Security benefits subtracted from federal AGI.

Up to $41,110 of retirement income from a pension plan, annuity contract, profit-sharing plan, retirement plan or employee savings plan, including IRA amounts and other similar income, is exempt.

Louisiana

Social Security benefits subtracted from federal AGI.

Up to $6,000 of the pension and annuity income of an individual taxpayer 65 or older is exempt.

Maine

Social Security benefits subtracted from federal AGI.

A recipient of pension benefits under an employee retirement plan may generally subtract from federal AGI the lesser of:
–$6,000 (reduced by the total amount of the recipient’s Social Security benefits and Railroad Retirement benefits paid); or
–The aggregate of pension benefits received by the recipient under employee retirement plans and included in the individual’s federal AGI.

Maryland

Social Security benefits subtracted from federal AGI.

Up to $27,100, generally, in pension income (except income from an IRA, SEP or Keogh) is excludable for an individual taxpayer age 65 or older.

Massachusetts

Social Security benefits subtracted from federal AGI.

Individual taxpayer’s pension income is generally taxable.

Michigan

Social Security benefits subtracted from federal AGI.

For individuals born prior to 1946, up to $47,309 in pension and retirement income is deductible on a single return ($94,618 on a joint return); however, distributions from certain 401(k) or 403(b) plans are taxable. For individuals born between 1946 and 1952, up to $20,000 is deductible on a single return ($40,000 on a joint return).  Additionally, senior citizens age 65 or older may also be able to deduct part of their interest, dividends and capital gains that are included in AGI. The deduction is limited to a maximum of $10,545 for single filers and $21,091 for joint filers.

Minnesota

State computation begins with federal taxable income. No subtraction.

Individual taxpayer’s pension income is generally taxable.

Mississippi

State computation not based on federal. Social Security benefits exempt in total.

Retirement allowances, pensions, annuities or “optional retirement allowances” (income from Keogh plan, IRA or deferred compensation plan) are exempt.

Missouri

Social Security benefits that are included in federal AGI may be subtracted. The maximum amount of benefits that may be deducted is 100 percent for 2012 and after. Married couples with Missouri AGI greater than $100,000 and single individuals with Missouri AGI greater than $85,000, may qualify for a partial deduction.

Married couples with Missouri AGI less than $100,000 and single individuals with Missouri AGI less than $85,000, may deduct 100 percent of their public retirement benefits, to the extent the amounts are included in their federal AGI. The total public pension exemption is limited to $35,234 for each spouse.
For a taxpayer with an income level above the AGI limits listed above, a partial exemption may be available.

Montana

Separate calculation to determine taxable Social Security benefits. Benefits exempt if income is $25,000 or less for single filers or heads of households or $32,000 for married taxpayers filing jointly and $16,000 for married taxpayers filing separately. 

For an individual taxpayer, up to $3,830 of pension and annuity income is exempt (reduced by $2 for every $1 of federal AGI that exceeds $31,920).

Nebraska

State computation begins with federal AGI. No subtraction.

Individual taxpayer’s pension income is generally taxable.

Nevada

No individual income tax.

No individual income tax.

New Hampshire

Only dividends and interest are taxable.

Only dividends and interest are taxable.

New Jersey

State computation not based on federal. All Social Security benefits are excluded by statute from gross income.

Married taxpayers filing jointly and age 62 or older with an income of $100,000 or less may exclude up to $20,000 of pension or annuity income, or of IRA withdrawals ($10,000 if an individual taxpayer is married and filing separately or $15,000 for a single taxpayer, a head of household or a qualifying widow(er)).

New Mexico

State computation begins with federal AGI. No subtraction.

An individual taxpayer age 65 or older may be exempt up to $8,000 of income, including pension income, depending upon the individual's filing status and federal AGI.

Joint filers, a surviving spouse or a head of household with AGI of $51,000 or more are ineligible for this exemption. A married individual filing separately becomes ineligible at $25,500. A single individual becomes ineligible at $28,500.

New York

Social Security benefits subtracted from federal AGI.

For an individual taxpayer age
59½ or older, $20,000 of pension and annuity income is exempt.

North Carolina

Social Security benefits subtracted from federal taxable income.

Up to $2,000 in retirement benefits, other than railroad retirement benefits, received during the tax year from one or more private retirement plans and included in federal gross income is deductible.

For a married couple filing a joint return, the maximum amount that may be deducted applies separately to the benefits received by each spouse.

North Dakota

State computation begins with federal taxable income. No subtraction.

Individual taxpayer’s pension income is generally taxable.

Ohio

Social Security benefits subtracted from federal AGI.

A recipient of retirement income may claim an annual credit ranging from $25 to $200, depending on the amount of benefit received during the year. Also, in lieu of the $50 senior citizen income credit (credit eligibility is dependent on age not retirement income) an individual taxpayer age 65 or older may claim a credit for a lump-sum distribution from a retirement, pension or profit-sharing plan equaling $50 times the taxpayer’s expected remaining life years. If they choose the lump sum distribution credit, however, they are no longer eligible for the annual senior citizen credit.

Oklahoma

Social Security benefits subtracted from federal AGI.

Up to $10,000 of retirement benefits from a private pension is exempt for an individual taxpayer age 65 or older, but not to exceed the amount included in federal AGI.

Oregon

Social Security benefits subtracted from federal taxable income.

An individual taxpayer age 62 or older may claim a credit for pension income from a public or qualified private pension benefit plan in the amount of the lesser of the individual’s net pension income or the individual’s state personal income tax liability.

Pennsylvania

State computation not based on federal. Social Security benefits not included in state taxable income.

Individual taxpayer’s pension income is not taxed if taxpayer is age 65 or older.

Rhode Island

State computation begins with federal taxable income. No subtraction.

Individual taxpayer’s pension income is generally taxable.

South Carolina

Social Security benefits subtracted from federal taxable income.

An individual taxpayer receiving retirement income may deduct up to $3,000. A taxpayer age 65 or older may deduct up to $10,000. The personal income tax deduction from taxable retirement income can only be claimed by the taxpayer who is the original owner of a qualified retirement account.

South Dakota

No individual income tax.

No individual income tax.

Tennessee

Only dividends and interest are taxable.

Only dividends and interest are taxable.

Texas

No individual income tax.

No individual income tax.

Utah

State computation begins with federal taxable income. No subtraction.

An eligible retiree age 65 or older is allowed a nonrefundable retirement credit of $450. An eligible retiree under age 65 is allowed a nonrefundable retirement credit equal to the lesser of $288 or 6 percent of the eligible retirement income for the taxable year for which the retiree claims the tax credit. These credits are phased out at 2.5 cents per dollar by which modified AGI exceeds $16,000 for married individuals filing separately, $25,000 for singles and $32,000 for heads of household and joint filers.

Vermont

State computation begins with federal taxable income. No subtraction.

Individual taxpayer’s pension income is generally taxable.

Virginia

Social Security benefits subtracted from federal AGI.

The $12,000 deduction available to an individual taxpayer age 65 or older is reduced dollar for dollar for every $1 that the taxpayer’s adjusted federal AGI exceeds $50,000 ($75,000 for married taxpayers). For a married taxpayer filing separately, the deduction is reduced by $1 for every $1 that the total combined adjusted federal AGI of both spouses exceeds $75,000.

Washington

No individual income tax.

No individual income tax.

West Virginia

State computation begins with federal AGI. No subtraction.

Individual taxpayer’s pension income is generally taxable.
However, subject to some qualification, an individual taxpayer who, by the last day of the tax year, has reached age 65 may deduct up to $8,000 to the extent that amount was includable in federal AGI.

Wisconsin

Full exclusion effective beginning in tax year 2008.

Individual taxpayer’s pension income is generally taxable.

Wyoming

No individual income tax.

No individual income tax.

SOURCE: Wolters Kluwer, CCH: 2013.

Permission for use granted.

 

       


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