Learn About States With No Pension Or Social Security Tax

States That Don't Tax Pensions or Retirement Income

Several states in the United States do not impose income taxes on pension income or Social Security benefits. This means residents who receive money from these sources may keep more of what they earn compared to residents in other states. Understanding which states have these tax advantages can be valuable information for people planning retirement or considering relocating.

As of 2024, the following states do not tax Social Security benefits: Alabama, Alaska, Arkansas, Arizona, Florida, Georgia, Hawaii, Idaho, Illinois, Indiana, Iowa, Kansas, Kentucky, Louisiana, Maine, Maryland, Massachusetts, Michigan, Mississippi, Missouri, Montana, Nebraska, Nevada, New Hampshire, New Mexico, North Carolina, North Dakota, Ohio, Oklahoma, Pennsylvania, South Carolina, South Dakota, Tennessee, Texas, Utah, Virginia, Washington, West Virginia, Wisconsin, and Wyoming. That's 37 states total, though some have specific conditions or limitations.

When it comes to pension income, the situation varies more widely. Some states tax all pension income, while others exclude certain types. For example, Mississippi allows residents over 59½ to exclude up to $91,803 of retirement income in 2024, while Illinois excludes all pension income. States like Pennsylvania and Texas have their own specific rules about what counts as pension income and how much can be excluded.

The distinction between states matters because a retiree receiving $40,000 per year in pension income might owe state taxes in one state but pay nothing in another. Over a 20-year retirement, this difference could amount to tens of thousands of dollars. The rules also change periodically as states update their tax codes, so checking current regulations matters for accurate planning.

Practical Takeaway: Create a list of states where you might want to live or already live, then research their specific rules about pension and Social Security taxation. Contact your state's revenue or taxation office to confirm current rules before making major decisions based on tax status.

How States Without Social Security Tax Work

Social Security provides monthly payments to retired workers, disabled individuals, and survivors of workers who died. When a state does not tax Social Security benefits, residents keep 100% of the Social Security payments they receive. This creates a meaningful financial advantage for many retirees who depend on these payments.

The mechanics of non-taxation work straightforwardly. When you receive a Social Security payment, you still must pay federal income taxes on a portion of those benefits if your income exceeds certain thresholds. However, if you live in a state with no Social Security tax, your state government does not claim any portion of that money. For example, a person receiving $2,000 monthly in Social Security ($24,000 annually) in a non-taxing state keeps that full amount from a state tax perspective, though federal tax may still apply depending on other income sources.

It's important to understand that "no Social Security tax" doesn't mean you pay no taxes at all while living in these states. Many states without Social Security taxes still collect income taxes on wages, investment earnings, or other sources. Florida, for instance, has no income tax on any source, but Texas taxes neither income nor Social Security. Meanwhile, New Hampshire taxes only interest and dividend income, leaving Social Security completely untouched. Each state designs its tax system differently.

The federal government does not restrict states from taxing Social Security. The decision belongs entirely to each state legislature. Some states have chosen not to tax Social Security as a way to attract and retain retirees, while others simply prioritize funding through different tax sources or spending priorities. There is no federal benefit or penalty for states making either choice.

Practical Takeaway: If you receive Social Security, calculate how much state tax you currently pay on it. Then research the specific state tax rates of any states you're considering for relocation. Even a 2% state tax on $25,000 in annual Social Security equals $500 per year—money that matters for retirement budgeting.

Understanding Pension Tax Exemptions and Limits

Pension income refers to regular payments you receive from a retirement account or pension plan based on your work history. Unlike Social Security, which is a federal program, pensions come from employers, unions, or individual retirement accounts. States handle pension taxation in wildly different ways, and some offer significant breaks while others tax pensions as ordinary income.

Illinois completely exempts pension income from state taxation for all residents, regardless of age or income level. This means someone receiving $60,000 annually from a teacher's pension or corporate retirement plan owes zero state income tax on that money in Illinois. Wisconsin, Mississippi, and several other states offer similar full exemptions, though some limit these to people over certain ages or with income below specific thresholds.

Many states use a partial exemption approach. For instance, Louisiana allows residents age 55 and older to exclude up to $6,000 of retirement income annually from state taxation. North Carolina excludes all pension and retirement income for residents age 55 and older. Indiana exempts military pensions and public employee pensions completely but taxes private pensions as ordinary income. These varying rules mean two people with identical $50,000 pensions could owe very different state taxes depending on their state and personal circumstances.

The age restrictions matter significantly. If you retire at 50 with a pension, you might owe substantial state taxes in North Carolina (which starts excluding pensions at age 55) but pay nothing in Illinois. This five-year difference could mean paying taxes on pension income during the years between 50 and 55. Additionally, some states grandfather in rules—meaning people already receiving pensions when a law changes remain under old rules, while new retirees follow new rules.

Practical Takeaway: Review your pension documents to understand exactly what type of pension you have (employer, military, public employee, etc.), then search your state's tax authority website for "pension income taxation" to find current exemption rules. Note any age limits or income caps that might affect you.

Comparing State Tax Burdens for Retirees

A retiree living in one state versus another can experience dramatically different overall tax obligations. Consider this comparison: A 67-year-old receiving $30,000 in Social Security and $35,000 in pension income ($65,000 total annual income). In Illinois, this person pays zero state income tax on both sources. In Connecticut, which taxes both Social Security and pensions, that same person might owe approximately $2,600 in state income taxes annually. Over a 25-year retirement, that difference totals $65,000—money that could have remained in the retiree's pocket.

However, state income taxes represent only one part of the total tax picture. Some states with no income tax compensate through higher property taxes, sales taxes, or other fees. Texas has no income tax but has a 6.25% state sales tax (though groceries are exempt). Tennessee has no income tax but also imposes a 9.55% sales tax. New Hampshire has no income tax and a 5% sales tax. Florida has no income tax and a 6% sales tax. A retiree living on a fixed income and spending actively in their community might pay substantial sales taxes even in a "no income tax" state.

Property taxes also vary enormously by state. New Jersey has the highest average property tax rate at over 2% of home value annually, while Hawaii has among the lowest at under 0.3%. A retiree with a $400,000 home could pay $8,000 annually in property taxes in New Jersey but only $1,200 in Hawaii. These figures interact with income tax status to create the actual overall tax burden. A state with no income tax but very high property taxes might not save a retiree money compared to a state with income taxes but lower property taxes.

Additional costs beyond taxes matter too. Healthcare costs, cost of living, housing prices, and utility expenses vary by region. Florida and Texas have no income tax, but Florida has higher insurance costs due to hurricane risk, while Texas housing in major cities has risen significantly. Alaska has no income tax and no sales tax in most cities, but heating and transportation costs run high, and housing in popular areas is expensive. Understanding the complete financial picture requires looking beyond tax status alone.

Practical Takeaway: Calculate your estimated state income taxes in your current state and in any states you're considering. Then research property tax rates, sales tax rates, and typical living expenses in those locations. A state tax calculator website can help you model different scenarios based on your specific income sources and amounts.

Rules and Restrictions You Should Know