How Pensions Get Taxed: What You Owe Federally and by State

Pensions are taxed as income, but the amount you pay depends on what kind of pension you have and where you live

Most pensions are taxed by the federal government as ordinary income in the year you receive them. That means the money counts toward your total income for the year, and you pay federal tax at whatever rate applies to your income bracket. However, some pensions — particularly military pensions and certain government employee pensions — have different federal treatment. State taxes add another layer: some states don't tax pensions at all, while others tax all pensions, and still others tax only certain types. The tax you actually owe depends on which of these categories your pension falls into.

The key to understanding your tax bill is knowing three things: the type of pension you receive, your total income for the year, and your state of residence. A pension from a private employer is treated differently than a military pension. A pension received in a state with no income tax is treated differently than one received in a state that taxes all pensions. This guide walks through how each type works and what you need to know before tax time.

Key Takeaways

• Most private pensions are taxed as ordinary federal income, meaning you pay tax at your regular income tax rate on the full amount you receive.
• Military pensions and certain government employee pensions may have partial or full federal tax exclusions, though rules vary by service branch and employment type.
• State tax treatment ranges from no tax at all to full taxation, and some states tax only military pensions or only pensions from government work.
• Your total income for the year — including Social Security, investment income, and other pensions — affects your tax bracket and may trigger additional taxes on Social Security benefits.
• You can request tax withholding from your pension payments so you don't owe a large bill at tax time, or you can make quarterly estimated tax payments.

How federal tax works on private pensions

A pension from a private employer — one you earned through years of work at a company — is taxed as ordinary income by the federal government. The full amount of your pension payment counts toward your income for the year. If you receive $30,000 in pension payments and have no other income, that $30,000 is your taxable income, and you pay federal tax based on the tax brackets for that year.

The tax rate you pay depends on your total income and your filing status. If you're single and your pension plus other income totals $47,150 in 2024, you fall into the 22% federal tax bracket. If you're married filing jointly and your combined income is $94,300, you're also in the 22% bracket. The brackets change each year, so the rate that applies to your income may be different from year to year.

You can reduce the amount of tax withheld from each pension check by filing a Form W-4P with your pension provider. This form lets you claim withholding allowances, which lowers the amount your provider takes out for taxes. You can also request no withholding at all, though that means you'll owe the full tax bill when you file your return. Many people choose to have some tax withheld so they don't face a large payment in April.

Federal tax treatment of military and government pensions

Military pensions receive special federal tax treatment. If you retired from the military before January 1, 2020, your entire pension is taxable federal income — there is no exclusion. However, if you retired on or after January 1, 2020, you may be able to exclude up to $250,000 of your military pension from federal taxation under the Military Pension Tax Exclusion. This exclusion applies only to the person who earned the pension, not to a surviving spouse who receives it after the retiree's death.

Federal civilian employees and railroad workers have a different rule. If you were born before January 2, 1936, and you retired under the Civil Service Retirement System (CSRS), you can exclude a portion of your pension based on how much you contributed to the system. The amount you contributed is not taxed again when you receive it as a pension. If you were born on or after January 2, 1936, or if you're under the Federal Employees Retirement System (FERS), your pension is taxed as ordinary income with no exclusion.

State and local government pensions — from teachers, police, firefighters, and other public employees — are taxed as ordinary federal income. There is no federal exclusion for these pensions, though some states offer their own tax breaks for state and local pensions.

State tax rules for pensions

State tax treatment of pensions varies widely and is one of the biggest factors in how much tax you actually pay. Nine states have no income tax at all: Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, Wyoming, and New Hampshire (which taxes only investment income, not wages or pensions). If you live in any of these states, you pay no state tax on your pension, regardless of the type.

Most other states tax all pensions as ordinary income. If you live in California, New York, Illinois, or most other states with income tax, your pension is taxed at your state's income tax rate. Some states have higher rates than others — California's top rate is 13.3%, while states like Colorado and Indiana have rates around 5%. The state rate applies to your pension in addition to federal tax.

A smaller group of states offers partial or full tax breaks for certain pensions. Mississippi, Pennsylvania, and Illinois exempt military pensions from state tax. Some states, including Georgia and Louisiana, offer tax breaks for pensions from government work but not private pensions. A few states, like Colorado and Missouri, offer limited exclusions based on age or income level. If you're considering moving in retirement, your state of residence can make a significant difference in your tax bill.

How pension income affects your Social Security taxes

If you receive both a pension and Social Security benefits, your pension income can trigger federal taxation of your Social Security. The federal government uses a formula called combined income to determine whether your Social Security is taxable. Combined income is your adjusted gross income plus nontaxable interest plus half of your Social Security benefits.

If you're single and your combined income is between $25,000 and $34,000, up to 50% of your Social Security benefits may be taxable. If your combined income exceeds $34,000, up to 85% of your benefits may be taxable. If you're married filing jointly, the thresholds are $32,000 and $44,000. Your pension counts fully toward this calculation, so a larger pension can push more of your Social Security into taxation.

This is one reason to think carefully about the total picture of your income in retirement. A pension of $40,000 plus Social Security of $20,000 might result in taxation of your Social Security benefits, while the same pension alone would not. Working with a tax professional or using the Social Security Administration's online calculator can help you understand how your specific situation works.

Withholding and estimated tax payments

When you start receiving a pension, your provider will ask you to complete a Form W-4P to specify how much tax to withhold from each payment. The form asks for your filing status, number of dependents, and other income. Based on this information, your provider calculates a withholding amount for each check.

If you want to change your withholding — for example, if you realize you're having too much or too little taken out — you can file a new W-4P with your pension provider at any time. You can also request that no tax be withheld, though this means you'll owe the full amount when you file your tax return. Some people choose no withholding if they have other sources of income that already cover their tax bill, or if they prefer to manage their taxes through quarterly estimated payments.

If you have income that doesn't have withholding — such as investment income, rental income, or a pension from a provider that doesn't withhold — you may need to make quarterly estimated tax payments to the IRS. These are payments made in April, June, September, and January for the previous quarter's income. If you don't pay enough tax throughout the year through withholding or estimated payments, you may owe a penalty when you file your return, even if you ultimately don't owe any tax.

Inherited pensions and survivor benefits

If you inherit a pension because the retiree has passed away, the tax treatment depends on your relationship to the retiree and the type of pension. A surviving spouse who inherits a pension can often roll it into an Inherited IRA and take distributions over their lifetime, spreading the tax bill across many years. A non-spouse beneficiary — such as an adult child — must generally withdraw the entire balance within ten years and pay tax on those withdrawals.

Military pensions paid to a surviving spouse are taxed as ordinary federal income, with no exclusion even if the retiree was may be able to access for the military pension exclusion. Some states offer tax breaks for survivor pensions from military service or government work, but this varies. If you're receiving a survivor pension, your pension provider should be able to tell you what withholding options are available and what your tax obligations are.

Frequently Asked Questions

Do I have to pay federal tax on my entire pension?

Most pensions are fully taxable as federal income. The main exceptions are military pensions for those who retired on or after January 1, 2020 (up to $250,000 exclusion), and CSRS pensions for those born before January 2, 1936 (partial exclusion based on contributions). All other pensions are taxed on the full amount received.

What states don't tax pensions?

Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, Wyoming, and New Hampshire have no income tax or don't tax pensions. If you live in one of these states, you pay no state tax on your pension. However, you still owe federal tax unless your pension qualifies for a federal exclusion.

Can I avoid withholding and pay taxes when I file my return?

Yes, you can request no withholding on your pension by filing Form W-4P with your provider. However, if you don't pay enough tax throughout the year through withholding or estimated quarterly payments, you may owe a penalty. Many people choose to have at least some tax withheld to avoid a large bill in April.

Will my pension push my Social Security into taxation?

Possibly. If your combined income (adjusted gross income plus nontaxable interest plus half your Social Security) exceeds $25,000 (single) or $32,000 (married filing jointly), some of your Social Security becomes taxable. Your pension counts toward this calculation, so a larger pension increases the chance your benefits will be taxed.

How do I know if my military pension qualifies for the federal exclusion?

The exclusion applies only if you retired on or after January 1, 2020. If you retired before that date, your entire pension is taxable. If you retired on or after that date, you can exclude up to $250,000 of your military pension from federal taxation. Your military finance office can confirm your retirement date and help you understand your tax situation.