State Pension Taxes by State: Where Your Retirement Income Gets Taxed the Least

State pension tax is one of the least-discussed line items in retirement planning, and one of the most consequential. A retired couple with $200,000 in combined pension, Social Security, and IRA income can owe $0 in state income tax in Wyoming and upward of $12,000 in California, according to the Tax Foundation’s 2026 State Income Tax Rates report. That gap does not shrink over time; it compounds across every year of retirement.

This article is for retirees and near-retirees who hold a defined benefit pension and want to understand exactly where their income lands on the state tax map. The recommendation works best when you know your pension type, public or private, because that single variable changes the answer in more states than most “best states for retirees” lists acknowledge.

Why State Pension Tax Can Cost You More Than You Think

The gap between the best and worst states for pension income is not marginal, it can run to more than $1,000 per month for a household with significant retirement income. Here’s what the data shows: a retired couple with $200,000 in combined pension, Social Security, and IRA distributions pays roughly $7,200 more per year in California than in Wyoming, according to the Tax Foundation’s 2026 analysis. Over a 25-year retirement, that compounds to over $180,000 in lost spending capacity.

State pension tax is not a single rule. It is a patchwork of at least four variables: income type (pension vs. Social Security vs. IRA withdrawal), pension source (public government vs. private employer), total household income (which triggers phase-outs in many states), and the retiree’s age (which activates age-based exclusions in states like Colorado and Georgia). A retiree who looks only at the headline income tax rate and misses these layers may end up with a nasty surprise on their first state return.

The stakes are also shifting. Michigan completed a three-year phase-out in tax year 2026 and now exempts significant pension income for most retirees. West Virginia eliminated its Social Security tax entirely. Iowa moved to a flat rate with full retirement income exemption. Any analysis from even 12 months ago is already partially outdated, which is why treating this as a static “best states” list is a mistake. For retirees also weighing whether to take a lump sum or monthly payments, the state you retire in matters enormously; you can read more about that decision in our breakdown of the federal pension lump sum vs. monthly payments trade-off.

The 16 States Where Pension Income Faces Zero, or Near-Zero, State Tax

Sixteen states do not tax pension income in 2026, but they get there two different ways, and the distinction matters. Nine states, Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming, levy no individual income tax at all. Pension income, Social Security, 401(k) distributions, IRA withdrawals: none of it is touched. A second group imposes an income tax on wages and other income but fully exempts qualified retirement income: Illinois, Mississippi, Pennsylvania, and Iowa (for residents aged 55 and older) round out the 16.

The 2026 Newcomers

Two states joined the favorable tier in 2026. Michigan completed the three-year phase-out mandated by Public Act 4 of 2023; most retirees now exclude up to $67,610 (single filer) or $135,220 (joint filers) of pension and retirement income from Michigan taxable income. Retirees who have not updated their state withholding elections since 2023 may be over-withholding and should check with the Michigan Department of Treasury. West Virginia fully eliminated its Social Security income tax in 2026, completing its own phaseout, a meaningful win for the large number of West Virginia retirees whose income is primarily Social Security.

New Hampshire is also now fully income-tax-free after the repeal of its Interest and Dividends Tax took effect in January 2025. Washington remains on the list for pension purposes, but it levies a 7% capital gains tax on gains above $270,000, that does not affect pension or 401(k) withdrawals, but it matters for retirees holding appreciated investments.

Public Pension vs. Private Pension: The Variable Most Lists Ignore

Your pension source changes everything in more states than you would expect. Many states that market themselves as retirement-friendly exempt government and military pensions entirely while taxing private employer pensions at full rates. This asymmetry is real and sourced directly to state revenue codes.

New York is the clearest example. State and local government pensions, including those from the New York State and Local Retirement System, are fully exempt from New York state income tax. Private-sector pensioners receive only a $20,000 annual exclusion. A retired state employee with a $50,000 pension owes nothing; a retired Verizon employee with the same pension owes New York income tax on $30,000 of it. Massachusetts follows a similar pattern: a federal retiree drawing a $40,000 FERS pension pays $0 in Massachusetts state tax on that pension, while a private-sector retiree with the same income pays the full Massachusetts rate.

Hawaii adds another wrinkle: it exempts non-contributory pensions (where the employee made no direct contributions) but partially taxes employee-contributed plans. Teachers and other public employees in states that exclude them from Social Security, California, Texas, Illinois, and 12 others, face a compounded version of this question, since their pension is often their only income stream and WEP/GPO rules may already reduce any Social Security benefit they would otherwise have earned. Retirees navigating these intersecting rules should also review Social Security claiming strategies that couples often overlook when building a state-aware retirement income plan.

State	Government Pension Treatment	Private Pension Treatment	State Income Tax Rate
Illinois	Fully exempt	Fully exempt	4.95% (wages only)
New York	Fully exempt (state/local)	$20,000 exclusion only	4.0%–10.9%
Massachusetts	FERS/CSRS exempt	Fully taxable	5.0%
Pennsylvania	Fully exempt	Fully exempt (if from qualified plan)	3.07%
California	Fully taxable	Fully taxable	1.0%–13.3%
Georgia	Up to $65,000 exclusion (65+)	Up to $65,000 exclusion (65+)	5.39%
Hawaii	Non-contributory exempt	Partially taxable	1.4%–11.0%

The Middle Ground: Age Thresholds, Income Phase-Outs, and Flat-Dollar Exclusions

Partial-exemption states deserve more attention than they typically get. For many retirees, especially those with modest, Social Security-heavy income, a state that technically taxes retirement income may produce a lower actual bill than a headline “no-tax” state with high property and sales taxes.

Colorado exempts up to $24,000 of pension income for residents aged 65 and older. Georgia offers up to $65,000 in retirement income exclusion for residents over 65. Connecticut exempts Social Security benefits entirely for single filers with adjusted gross income below $75,000. Delaware, as noted earlier, allows up to $12,500 in pension and retirement income exclusion for residents 60 and older, and it pairs that with no sales tax and relatively modest property taxes, making it genuinely competitive even against no-income-tax states. For retirees working through the full budget picture, our guide on budgeting on a fixed income covers how to structure spending around these state-level variables.

The States That Tax Pension Income Hardest, and What It Actually Costs

California offers the least relief of any large state: it taxes all pension and retirement income at progressive rates that reach 13.3% at the top, and it does not exempt Social Security. Minnesota taxes Social Security, pensions, and 401(k)/IRA withdrawals as ordinary income with a floor rate of 5.35%. Vermont, Connecticut (above the AGI threshold), and Rhode Island also land among the least favorable states for pension-heavy retirees.

A Worked Dollar Example

Consider two retirees, each with $80,000 in annual income: $40,000 from a private pension, $24,000 from Social Security, and $16,000 from IRA withdrawals. In Illinois, all of it is exempt from state tax: the bill is $0. In California, assuming roughly a 5% blended effective rate on the taxable portion (Social Security is not taxed federally below a certain threshold, but California taxes all of it at state rates), the state income tax liability runs approximately $4,000–$5,000 per year. Over 20 years, that is $80,000–$100,000 in additional state tax paid, money that, in Illinois, stays in the retiree’s account.

The No-Income-Tax Trap: Why the Headline Hides Half the Cost

No income tax does not mean low total tax. Texas is the most cited example: it levies no state income tax, but its property taxes are among the highest in the country, consistently ranking in the top five nationally. Tennessee’s combined state and local sales tax rate averages 9.61%, one of the highest in the country. A retiree who avoids $4,000 in income tax but pays an extra $3,500 in property and sales taxes has not saved nearly as much as the headline suggests.

Wyoming is the cleaner story: it has no income tax, below-average property taxes, and a modest sales tax rate of 4.0% (plus local additions that average below 2%). A retiree optimizing for total tax burden, income, property, sales, and estate combined, finds Wyoming genuinely competitive on all four dimensions. Florida presents a more complicated picture: no income tax, no estate tax, and historically moderate property taxes, but a November 2026 ballot measure proposes eliminating property taxes on primary residences entirely. Economists have warned that if it passes, it could trigger compensating increases in sales and other taxes, a live illustration of how the retirement tax map can shift. Delaware is worth a second look for retirees who prioritize a complete picture: a state income tax, yes, but no sales tax, low property taxes, no estate tax, and the $12,500 pension exclusion described earlier.

Retirees who are also weighing how to position investment assets across state lines should consider reading our analysis of bond allocation in retirement portfolios, since fixed-income distributions interact differently with state tax rules than pension income does.

Where This Recommendation Falls Short

The recommendation to prioritize states that fully exempt pension income is the right starting point, but it is not for everyone, and the catch is not minor.

First: the recommendation is built around state income tax, which is only one piece of the retirement cost equation. A retiree who moves from California to Texas to escape the 13.3% top rate will save meaningfully on income tax but may find property taxes running $6,000–$10,000 per year on a modest home, compared with $3,000–$4,000 in many California counties with Proposition 13 protections intact. The tradeoff is real and state-specific.

Second: for retirees whose income is primarily Social Security, the ranking of states changes significantly. Many states that tax pensions do not tax Social Security, or phase it out quickly at modest income levels. Someone drawing $28,000 per year entirely from Social Security may owe $0 in a state not on the “exempt” list, and that state may offer better healthcare networks, family proximity, or cost-of-living advantages that no tax calculation captures.

Third: the residency risk is underreported and worth naming plainly. California and New York do not simply accept a change-of-address form as proof of residency. Their auditors use cell tower location data, credit card records, utility usage, and the location of a retiree’s primary physicians and closest family members to build a case that the retiree is still legally domiciled in the old state. If New York classifies a retiree as a “statutory resident”, meaning they spent 183 or more days in New York and maintain a permanent place of abode there, it can tax all income exactly as if they never left. The savings a retiree expected from moving to Florida may be clawed back in full, plus penalties.

Fourth, a concession on federal changes: the One Big Beautiful Budget Act includes an additional $6,000 standard deduction for taxpayers aged 65 and older for tax years 2025–2028. Most states do not conform to federal AGI adjustments automatically, so this federal deduction may produce no state-level benefit in states that calculate their own taxable income independently. Retirees should not assume a federal tax improvement flows through to their state return without verifying conformity.

The drawback, in short, is that the right answer depends on the full cost stack, not just the pension income line. This article’s recommendation is the right first filter. It should not be the last one.

Frequently Asked Questions

Which states have no state pension tax in 2026?

Sixteen states do not tax pension income in 2026, according to Kiplinger. Nine of those, Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming, have no individual income tax at all. Illinois, Mississippi, Pennsylvania, and Iowa (for residents 55 and older) have income taxes but fully exempt qualified retirement income including pensions.

Does it matter whether my pension is from a government employer or a private company?

Yes, and this is the most important variable many retirees miss. States like New York, Massachusetts, and Hawaii distinguish sharply between public and private pensions. A federal retiree in Massachusetts owes $0 state tax on a FERS pension; a private-sector retiree with identical income pays Massachusetts’s 5.0% rate on all of it. Always check your specific pension source against the state’s published exemption rules.

Can a “no income tax” state still cost me more in retirement?

Absolutely. Texas has no income tax but property taxes that rank among the highest in the country. Tennessee’s combined sales tax rate averages 9.61%. Total retirement cost includes income tax, property tax, sales tax, and estate tax together. Wyoming scores well on all four; Texas and Tennessee trade one low line for others that are high.

What happens to my pension taxes if I move to a new state mid-year?

Moving mid-year triggers part-year resident returns in both states. Under federal law, only the state where you actually live in retirement can tax your pension, not the state where you earned it. However, “sticky states” like California and New York actively audit residency changes; if you spend 183 or more days in the prior state after a claimed move, it can classify you as a statutory resident and tax all of your income.

Is Social Security taxed the same way as pension income at the state level?

No, and the rules differ significantly. Many states that tax private pensions still exempt Social Security, or phase it out at modest income levels. California, does not tax Social Security but fully taxes pensions and IRA withdrawals. A retiree with income mostly from Social Security has a different optimal state than one drawing primarily from a defined benefit pension or IRA. Mapping your specific income types to each state’s exemption categories is essential before drawing any conclusions. For couples thinking through the full picture, our guide on Social Security claiming strategies covers how benefit timing interacts with state tax rules.