Quick Answer
27 states offer pension income exclusions ranging from $3,000 to unlimited amounts. Top exclusions include: Illinois and Pennsylvania (unlimited), Michigan ($55,980 for 2026), Georgia ($65,000), and North Carolina ($50,760). Military pensions often receive enhanced treatment with 13 states offering complete exemptions.
Best Answer
Robert Kim, CPA
Retirees and pre-retirees who want to understand which states offer the best pension tax treatment for retirement planning
States with the most generous pension exclusions
Pension exclusions vary dramatically by state, from complete exemptions to modest caps. Understanding these differences is crucial for retirement tax planning and potential relocation decisions.
Unlimited pension exclusions (the gold standard)
Illinois: No state tax on any retirement income including pensions, 401(k), IRA, and Social Security. This saves retirees approximately 3-5% of their total retirement income annually.
Pennsylvania: Complete exemption for all retirement income from employer-sponsored plans, IRAs (after 59½), and Social Security. A retiree with $60,000 in pension income saves roughly $1,800-$2,400 per year compared to full taxation states.
Hawaii: No tax on pension income for residents, though 401(k) and IRA withdrawals are taxed as regular income.
States with substantial but capped exclusions
Michigan (2026 limits): Up to $55,980 per person for taxpayers born before 1953. Taxpayers born 1953-1958 get partial benefits, and those born after 1958 receive standard deduction treatment only.
Georgia: Up to $65,000 per person (age 65+) for all retirement income including pensions, 401(k), and IRA withdrawals. Married couples can potentially exclude $130,000 combined.
North Carolina: Up to $50,760 per person for government and military pensions. Private pensions don't qualify, making this less valuable for corporate retirees.
State-by-state pension exclusion breakdown
Example: Comparing pension tax treatment
Scenario: Married couple, both 67, with $40,000 annual pension and $25,000 Social Security
Illinois:
Georgia:
New York:
California (no exclusion):
Military pension special treatment
13 states completely exempt military retirement pay from state income tax: Alaska, Florida, Illinois, Iowa, Kansas, Louisiana, Massachusetts, Michigan, New Hampshire, New York, Pennsylvania, Texas, and Wyoming.
Additional states offer enhanced military pension exclusions:
What affects your pension exclusion eligibility
Age requirements: Most exclusions require you to be 59½ or older when receiving benefits. Some states like Georgia have tiered benefits based on age.
Income limitations: Few states impose income caps, but West Virginia limits benefits to taxpayers with AGI under $50,000.
Pension source: Some states only exclude government pensions, while others include all employer-sponsored retirement plans.
Residency requirements: Generally, you must be a state resident when receiving the pension, not necessarily when you earned it.
What you should do
1. Identify your state's current pension exclusion rules using your state's tax forms and instructions
2. Calculate your potential annual savings by multiplying excluded income by your state tax rate
3. Consider tax implications if relocating in retirement
4. Review previous returns for missed pension exclusions using our return scanner
Key takeaway: 27 states offer pension exclusions from $3,000 to unlimited amounts. Illinois and Pennsylvania provide unlimited exclusions worth $1,500-$3,000 annually for typical retirees, while military pensions receive preferential treatment in 13+ states.
*Sources: [IRS Publication 575 - Pension and Annuity Income](https://www.irs.gov/pub/irs-pdf/p575.pdf), State Department of Revenue publications*
Key Takeaway: 27 states offer pension exclusions from $3,000 to unlimited amounts. Illinois and Pennsylvania provide unlimited exclusions worth $1,500-$3,000 annually for typical retirees.
State pension exclusion amounts and requirements
| State | Exclusion Amount | Age Requirement | Special Notes |
|---|---|---|---|
| Illinois | Unlimited | None | All retirement income |
| Pennsylvania | Unlimited | 59½ for IRAs | Employer plans only |
| Michigan | $55,980 (2026) | Varies by birth year | Phased by age |
| Georgia | $65,000 | 65+ ($35K at 62-64) | All retirement income |
| North Carolina | $50,760 | None | Gov't/military only |
| New York | $20,000 | 59½ | Private pensions only |
| Arkansas | $6,000 | 59½ | All pensions |
More Perspectives
Robert Kim, CPA
Current retirees who want to understand if they're maximizing their pension exclusions and identify missed opportunities
Are you claiming your full pension exclusion?
Many retirees I work with aren't claiming their complete pension exclusion because they're unsure about the rules or limits. Here's what I commonly see missed:
Common pension exclusion mistakes
Claiming partial exclusions: If your state allows $50,000 in pension exclusions and you have $60,000 in pension income, make sure you're excluding the full $50,000 — not just a portion.
Missing spouse's separate exclusion: In most states, each spouse can claim their own pension exclusion. A married couple in Georgia could potentially exclude $130,000 combined ($65,000 each) if both have qualifying retirement income.
Not understanding "pension" definition: Many states define "pension" broadly to include 401(k) withdrawals, 403(b) distributions, and even some IRA withdrawals. Don't limit yourself to traditional pensions.
State-specific senior considerations
Age tier benefits: States like Georgia offer increasing exclusions by age. At 62-64, you can exclude $35,000. At 65+, this jumps to $65,000. Make sure you're using the correct age-based limit.
Birth year phase-outs: Michigan's pension exclusion depends on when you were born. If you were born before 1953, you get the full $55,980 exclusion. Later birth years have reduced or no benefits.
Military vs. civilian treatment: If you have both military and civilian pensions, understand that some states treat them differently. North Carolina fully excludes military pensions but limits civilian pension exclusions.
Multi-state pension issues
If you worked in one state but retired in another, research both states' rules:
What to do if you've missed exclusions
You can file amended state returns for up to 3 years to claim missed pension exclusions. I've helped clients recover $1,500-$4,500 in refunds by correcting missed exclusions from previous years.
Key takeaway: Many retirees miss thousands in pension exclusions due to unclear rules about spouse exclusions, age tiers, and broad definitions of "pension income."
Key Takeaway: Many retirees miss thousands in pension exclusions due to unclear rules about spouse exclusions, age tiers, and broad definitions of "pension income."
Sources
- IRS Publication 575 — Pension and Annuity Income
- IRS Publication 554 — Older Americans' Tax Guide
Related Questions
Reviewed by Robert Kim, CPA on February 28, 2026
This content is for educational purposes only and is not a substitute for professional tax advice. Consult a qualified tax professional for advice specific to your situation.