Is Pension Income Taxable?

 

Pensions are a source of retirement income that are employer sponsored.

Upon retirement, you can generally start receiving payouts from your pension. The amount of your pension depends on your age, salary, and the length of tenure with the employer sponsoring the pension.

pension tax

You can receive pension payments in two ways:

  • Monthly payments
  • Lump-sum payments

Are Pensions Taxed?

Pensions are usually funded with pre-tax income, so you will pay income tax on all pension payments (unless you contributed after-tax to your pension) upon withdrawal.

States that Do Not Tax Pensions

There are some states that do not tax pensions. So, you will not pay state income tax upon withdrawal of the funds. Does your state have a retirement exclusion? Here are the states that don’t tax qualifying pensions:

  • Alabama
  • Alaska
  • Florida
  • Hawaii
  • Illinois
  • Mississippi
  • Nevada
  • New Hampshire
  • Pennsylvania
  • South Dakota
  • Tennessee
  • Texas
  • Washington
  • Wyoming

What Pensions Are Not Taxable?

If you’re wondering, “What pensions are not taxable?” Here’s the answer: You don’t pay tax on the portion of the pension payments that represent a return of the after-tax amount you contributed.

IRS Publication 575

IRS Publication 575 distinguishes the tax treatment of pensions, including how to report income from these distributions on a tax return. View IRS Publication 575.

Where to Go for Help with Retirement Income and Taxes

A tax pro can help you navigate your tax requirements with retirement income. Learn more about ways to file with H&R Block!

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