Your State Could Be Taxing Your Pension More Than You Realize—Here’s How to Check

Missy E
November 14, 2025

Key Takeaways

In 2025, some states fully tax your pension income while others offer partial or full exemptions—and the rules can vary by the type of retirement income you receive.
You may be able to reduce or avoid unexpected taxes by understanding your state’s current laws, exemptions for government retirees, and any credits or thresholds that apply.

Why Your State’s Tax Policy Matters More Than Ever

Your federal pension, Social Security benefits, and any withdrawals from retirement accounts like a TSP, IRA, or annuity

might be taxed differently based on where you live. And in 2025, with several states updating or reinterpreting tax rules to address revenue shortfalls or demographic shifts, your retirement income may be affected more than you expect.

States don’t all follow the federal government’s lead when it comes to taxing retirement income. While some states offer generous exemptions, others tax your pension just like regular income. Knowing the rules is essential, especially if you’re planning a move or trying to optimize your income in retirement.

Which States Fully Tax Public Pensions?

In 2025, there are still a handful of states that treat your government pension the same as they would any other income. These states generally do not offer special exemptions or credits for government retirees:

California
North Carolina
Rhode Island
Vermont
Utah

In these states, your pension from federal service (FERS or CSRS), military retirement, or other public-sector pensions is generally subject to state income tax at your full marginal rate.

Some of these states may allow minor deductions or age-based credits, but they do not exempt pension income entirely or offer government-specific carveouts.

States That Offer Full Exemption for Government Pensions

On the opposite end of the spectrum, several states offer full exemptions for government pensions. This means your CSRS or FERS annuity may not be taxed at all by your state.

Illinois
Pennsylvania
Mississippi
Hawaii
Alabama

In these states, qualified public pensions—and in some cases military retirement and Social Security as well—are excluded from taxable income. Note, however, that these rules often only apply to defined benefit pensions, not TSP or IRA withdrawals, which may still be taxed.

Partial Exemptions and Income Thresholds

Many other states fall somewhere in the middle. Some offer partial exemptions or deductions that depend on factors like your age, total income, or the type of pension.

For example:

New York excludes federal, state, and local government pensions entirely, but other retirement income like TSP withdrawals is only exempt up to $20,000 per year if you’re 59½ or older.
Georgia offers an exclusion up to $65,000 per person (as of 2025) for retirement income starting at age 65, including pension and IRA income.
Michigan has a tiered system depending on your birth year and retirement type, with different caps for deductions.

If you’re unsure how your state calculates pension exemptions, you’ll want to consult the latest state tax guide or reach out to a professional.

What About States With No Income Tax?

Nine states currently have no personal income tax in 2025:

Alaska
Florida
Nevada
South Dakota
Texas
Washington
Wyoming
Tennessee
New Hampshire

Retirees in these states won’t pay any state income tax on pensions, IRAs, or TSP withdrawals. However, other taxes—like sales or property tax—may be higher to offset the absence of income tax. Tennessee and New Hampshire, which previously taxed interest and dividends, now fully exempt all personal income as of 2025.

Still, not having a state income tax doesn’t always mean you’re getting the best deal overall. It’s important to evaluate the full picture, including healthcare costs, housing, and tax treatment of other income.

CSRS vs. FERS vs. TSP: Not All Retirement Income Is Treated the Same

Even within a single state, your retirement income may be taxed differently depending on the source.

CSRS annuities are generally treated as defined benefit pensions and are eligible for most pension exemptions.
FERS annuities are also treated as pensions but may be lower, making you more reliant on other taxable income.
TSP withdrawals (traditional) are treated like IRA distributions and usually taxed as ordinary income.
Roth TSP withdrawals are not taxed federally if qualified, and most states follow suit. But confirm if your state conforms.

It’s essential to know which bucket your money is coming from, so you can determine how much of it is subject to state taxation.

Social Security: Taxed by the Feds, But Not Always by States

At the federal level, your Social Security benefits may be taxed depending on your combined income.

But at the state level, only 10 states tax Social Security in any form as of 2025. These include:

Colorado
Connecticut
Kansas
Minnesota
Missouri
Montana
Nebraska
New Mexico
Utah
Vermont

Several of these states offer income-based exemptions or phase-outs. For instance, Colorado exempts up to $24,000 in retirement income per person. Minnesota phases out taxes on Social Security for lower-income retirees. And New Mexico has recently increased income limits for exemptions.

If your retirement income is modest, you may avoid state-level taxation on Social Security even in these states.

How Residency Rules Can Affect State Taxes

One often-overlooked factor is how a state determines residency for tax purposes. If you spend part of the year in a second home or are planning to move, you need to understand these rules to avoid double taxation or unexpected bills.

Some key things to know:

Permanent Residency: Most states tax all income of permanent residents, even if earned elsewhere.
Domicile vs. Residency: A few states may consider you a resident based on where you vote, register your vehicle, or spend most of your time.
183-Day Rule: Many states use the 183-day rule to determine if you’re a resident. Spending more than half the year there might make you liable for taxes on your full income.

If you’re considering relocating in retirement, make sure to plan carefully around these definitions.

Planning Around State Taxes Before and After You Retire

If you’re still working but planning to retire in the next few years, the state you choose to retire in can have a significant effect on your long-term finances. Start evaluating your options early.

Here are some steps to take:

Estimate your pension and TSP income in retirement and break it down by source.
Check your current state’s tax rules for each income type.
Review neighboring states’ policies if you plan to move or already own property elsewhere.
Calculate total tax impact, including property taxes, sales taxes, and estate/inheritance taxes.
Use a tax professional who specializes in public sector retirement if you have complex income streams.

Even a small percentage change in your effective tax rate can translate into thousands of dollars over a 20- or 30-year retirement.

State Tax Laws Can Change Faster Than You Think

Many retirees believe that once they understand the rules, they won’t need to revisit them. But state tax policies are not set in stone.

In fact, between 2020 and 2024, at least a dozen states made changes to how they tax retirement income—from adjusting thresholds and exemptions to phasing in full exclusions.

In 2025, several states have legislation pending or enacted that may shift treatment of pensions, particularly in response to:

Budget shortfalls
Aging populations
Out-migration of retirees

You should plan to review your state tax landscape at least every year, especially during election years or legislative sessions.

What to Do If You Think You’re Overpaying

If you suspect you’re paying more in state taxes than necessary, you have a few options:

Amend prior year returns if you missed claiming exemptions or credits.
Consult your state’s Department of Revenue for guidance or updates on pension treatment.
Work with a tax professional to identify overlooked deductions.
Consider strategic relocation if the long-term tax savings justify the move.

Over time, even a few percentage points of tax savings can significantly impact the sustainability of your retirement income.

Understanding How Your State Treats Your Pension Can Save You Thousands

Taxes don’t end when your paycheck does. As a government retiree, it’s on you to understand where and how your income is taxed—and what steps you can take to reduce the impact.

While the federal government has consistent rules, state-level policies can vary dramatically. Knowing what applies to your FERS annuity, CSRS benefits, TSP withdrawals, and Social Security benefits can help you better plan your income streams and preserve more of your money.

If you’re unsure where to start, a licensed agent listed on this website can help you evaluate your situation and explore options that align with your retirement goals.