Trying to file your taxes can be tough enough without the added worry of whether you're filing in the correct state. For many years, retirees faced confusion over whether to pay taxes on pension income in the state where the money was earned or their current state of residence. Fortunately, changes to federal law helped to eliminate some confusion and clarify the tax process for seniors.
Prior to 1996, some states maintained statutes allowing for "source taxes." These statutes required people who earned pension income in a state to continue paying taxes to that state even if they no longer lived there. For example, a 1989 report in the Schenectady Gazette describes the plight of a retired woman who earned a pension from California. Though the woman had moved to Nevada more than nine years earlier, she still received a tax bill from the state of California for her pension income. Seniors across the United States faced similar scenarios, thanks to various incarnations of this source tax law.
Source Tax Law
On Jan. 10, 1996, Congress enacted the Pension Source Tax Act of 1996 (P.L. 104-94). This law specifically stipulates that, "No State may impose an income tax on any retirement income of an individual who is not a resident or domiciliary of such State." While the Source Tax law still allows individual states to define residency on their own terms, it prohibits any state from taxing non-residents for pensions earned within the state. If you earn a pension in Vermont, for instance, then retire to New York, Vermont may not tax your pension income.
You may still have to pay state taxes on pension income to the state where you earned the money and your state of residence in some instances, however. For example, if you retire and move from California to Maryland in June, you may be considered a partial resident of both states and be required to file returns and pay taxes in both states in the year you move. Some states also require part year residents to pay income tax on retirement income earned in the state, even if they live part of the year in another state. In Oregon, for example, people who maintain at least part-time residency must pay taxes on pensions earned in Oregon, even if they live part of the year in another state. Check with your state tax department to learn about specific rules in your state.
Pensions and State Taxes
While the state where you earned your pension may not tax your retirement income, you may still have to pay taxes on the income in your state of residency. For example, if you earn a pension in South Carolina, then move to North Carolina, the state of North Carolina may require you to pay taxes on this income. Tax rules on retirement income vary significantly by state. Nine states, including Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington and Wyoming charge no state income taxes. Alabama, Mississippi and Pennsylvania exclude virtually all pension income from state taxes. Many other states also allow partial exemptions or special rules for pension income.
Emily Beach works in the commercial construction industry in Maryland. She received her LEED accreditation from the U.S. Green Building Council in 2008 and is in the process of working towards an Architectural Hardware Consultant certification from the Door and Hardware Institute. She received a bachelor's degree in economics and management from Goucher College in Towson, Maryland.