Which States Don't Tax Federal Retirement Income?
Tax-Friendly States for FERS Retirees
State income tax on your FERS pension can take a significant bite out of your retirement paycheck — or nothing at all, depending on where you live. For many federal retirees, moving to a tax-friendly state before or after retirement is worth tens of thousands of dollars over a 20-year retirement.
States With No Income Tax (Best for Retirees)
These 9 states have no state income tax at all. Your FERS pension, Social Security, and TSP withdrawals are all state-tax-free.
States That Exempt Federal Pensions
These states have state income tax but specifically exempt federal retirement income, in whole or in part. Rules vary — check with a tax advisor for your specific situation.
| State | Details |
|---|---|
| Alabama | Fully exempt from state income tax |
| Hawaii | Federal pensions fully exempt |
| Illinois | All retirement income exempt |
| Iowa | Retirement income exempt for those 55+ |
| Kansas | Federal pensions exempt if retired before 1984 |
| Louisiana | Federal pensions partially exempt |
| Michigan | Federal pensions generally exempt |
| Mississippi | Retirement income exempt |
| New York | Federal pensions exempt from NY state tax |
| North Carolina | Bailey exemption for pre-Aug 1989 retirees |
| Pennsylvania | No state tax on pension income |
Tax laws change. Verify current rules with your state revenue department or a CPA.
How Much Does State Tax Actually Cost?
Example: $36,000/Year FERS Pension
- No state tax (FL, TX, etc.)$0/year
- Pennsylvania (exempt)$0/year
- Virginia (5.75% state tax)−$2,070/year
- California (9.3% state tax)−$3,348/year
- New York City + NY state−$3,600+/year
Over 20 years, living in Virginia vs. Texas could cost you $40,000+ in additional state taxes on your pension alone — before accounting for Social Security and TSP withdrawals.
How TSP Withdrawals Are Taxed by State
Your FERS pension exemption may not apply to your TSP withdrawals. TSP withdrawals are generally taxed as ordinary income by most states — even states that exempt your FERS pension may tax traditional TSP distributions. This is a critical planning distinction that many retirees overlook.
| State | FERS Pension | TSP Withdrawals |
|---|---|---|
| Florida / Texas / Nevada | No tax | No tax (no state income tax) |
| Pennsylvania | Exempt | Exempt (for eligible retirees) |
| New York | Exempt | Taxable (ordinary income) |
| Virginia | Partially taxable | Taxable (some deductions at 65+) |
| California | Taxable | Taxable |
| Illinois | Exempt | Exempt (all retirement income) |
Verify current rules with a CPA — state tax laws change frequently. This table reflects general rules as of 2025.
How Social Security Is Taxed by State
Federal taxes on Social Security are well known — up to 85% of benefits can be taxable federally. But state taxation of Social Security is a separate issue. Most states do not tax Social Security at all. The following states tax Social Security benefits (rules and thresholds vary):
For FERS retirees drawing FERS pension + Social Security + TSP, the combined state tax picture varies significantly. A retiree in Minnesota might pay $3,000–$5,000/year more in state taxes than the same retiree in Florida or Texas.
States That Fully Tax Federal Pensions
These states tax federal retirement income just like ordinary income. If you're considering relocating in retirement, these states are generally less favorable for FERS retirees:
Many of these states offer deductions or exemptions for retirees 65+. Check current rules with your state.
Beyond State Tax: Other Retirement Considerations
State income tax is one factor. When evaluating states for retirement, also consider:
- → Property tax rates and homestead exemptions for seniors
- → Cost of living index — a tax-free state with high housing costs may not save money
- → Quality and cost of healthcare, especially if you need to bridge before Medicare at 65
- → Proximity to VA medical centers if you have service-connected disabilities
- → Estate and inheritance tax in your state
Frequently Asked Questions: State Taxes and Federal Retirement
Q: If I live in Virginia but plan to move to Florida after retirement, which state's rules apply?
A: Your state of legal residence on December 31 of each tax year determines which state taxes you. If you retire in June while still a Virginia resident and move to Florida in October, you'll owe Virginia income tax on your Virginia-period income that year. Once you establish Florida as your domicile, no state tax applies going forward.
Q: Does VA disability compensation get taxed by states?
A: No. VA disability compensation is federally tax-free under USC Title 38 and is also exempt from state income tax in all 50 states. States cannot tax VA disability payments.
Q: Maryland taxes federal pensions — but I've heard about a deduction for retirees?
A: Yes. Maryland allows a pension exclusion of up to $36,200 (for those 65+) or $20,000 (ages 55–64) from state income tax. This doesn't eliminate the tax, but significantly reduces the burden for many FERS retirees with modest pensions.
Q: I'm a federal employee working in DC — does DC tax my FERS pension?
A: Yes. Washington, DC taxes federal pensions as ordinary income, but offers a $3,000 exclusion for government pension income. DC is often overlooked because it's not a state, but it has its own income tax rules.
Q: Is the FERS Special Retirement Supplement taxed by states?
A: The FERS Supplement is treated like your regular FERS annuity for state tax purposes. States that exempt your pension will generally also exempt the Supplement; states that tax your pension will also tax the Supplement.
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Tax laws change frequently. This is for educational purposes only. Consult a CPA or tax advisor for your specific situation.