How Much Is a Pension Taxed? Federal, State, and IRMAA Rules

How much a pension is taxed depends first on the federal government, which treats pension payments as ordinary income at rates between 10% and 37% for 2026, and then on your state, which may tax the same income at anywhere from 0% up to its full ordinary rate.¹ The exact bill turns on your total taxable income, your filing status, whether any of your contributions were made with after-tax dollars, and whether you take the money as monthly payments or a lump sum.

Federal Tax Rates on Pension Income

The IRS taxes pension distributions at the same marginal rates as wages.² For a single filer in 2026, the brackets run:

10% on income up to $12,400
12% from $12,401 to $50,400
22% from $50,401 to $105,700
24% from $105,701 to $201,775
32% from $201,776 to $256,225
35% from $256,226 to $640,600
37% above $640,600

Married couples filing jointly get thresholds roughly double these figures.³ Your pension does not sit in its own bucket. It stacks on top of Social Security, part-time wages, and investment income, so a $30,000 pension that would fall in the 12% bracket by itself can end up partly taxed at 22% or 24% once combined with everything else.

If your employer funded the plan or your own contributions were made pre-tax, every dollar of every payment is taxable.² That describes most retirees. The exception is any portion you funded with after-tax dollars, which comes back to you tax-free.

The Tax-Free Portion When You Made After-Tax Contributions

Money you already paid tax on should not be taxed again when it comes back as pension income.¹ Most retirees use the IRS Simplified Method: divide your total after-tax contributions by a set number of expected monthly payments tied to your age when payments begin.⁴

Age 55 or younger: 360 payments
56 to 60: 310 payments
61 to 65: 260 payments
66 to 70: 210 payments
Over 70: 160 payments

Say you put in $52,000 of after-tax money and start collecting at 63. Divide $52,000 by 260 and you get $200 a month that arrives tax-free. The rest of each check is taxable. That $200 exclusion stays constant month after month, and once you have recovered your full basis, every subsequent payment becomes fully taxable.¹ Skip the calculation and you will overpay on money you already paid tax on once.

An Extra 10% If You Start Before 59½

Take pension money before age 59½ and the taxable portion generally gets an extra 10% federal tax on top of ordinary income tax.⁵ On a $2,000 monthly payment, that is another $200 gone every month.

Common exceptions to the penalty for a qualified employer plan:

You separated from that employer during or after the year you turned 55 (age 50 for state and local public safety employees).
You are totally and permanently disabled.
You take the money as substantially equal periodic payments over your life expectancy.

The separation-from-service exception is a plan rule, not an IRA rule, so it does not carry over if you first roll the money into an IRA.⁵

How a Pension Makes Your Social Security Taxable

Pension income has a second effect that catches many retirees off guard: it can pull your Social Security benefits into taxable territory. The IRS uses “combined income,” meaning your adjusted gross income plus any nontaxable interest plus half of your Social Security, to decide how much of the benefit is taxed.⁶

Single filers: combined income of $25,000 to $34,000 makes up to 50% of benefits taxable; above $34,000, up to 85%.
Married filing jointly: $32,000 to $44,000 makes up to 50% taxable; above $44,000, up to 85%.

Pension payments feed directly into adjusted gross income, so even a modest pension can push you past a threshold. A single retiree with $20,000 in Social Security and a $15,000 pension has combined income of $25,000, right at the point where half the benefit becomes taxable.⁷ Another $10,000 of pension takes combined income to $35,000, and up to 85% of the benefit becomes taxable. These thresholds have never been indexed for inflation.

Medicare Premium Surcharges (IRMAA)

Higher pension income can also raise your Medicare premiums through the Income-Related Monthly Adjustment Amount. Medicare looks at your modified adjusted gross income from two years earlier to set surcharges on Part B and Part D. For 2026, surcharges kick in above $109,000 for single filers and $218,000 for joint filers.⁸

Part B surcharges for single filers in 2026:

$109,001 to $137,000: $81.20 extra per month
$137,001 to $171,000: $202.90 extra
$171,001 to $205,000: $324.60 extra
$205,001 to $499,999: $446.30 extra
$500,000 or more: $487.00 extra

Part D carries its own surcharges at the same income tiers.⁸ This matters most with a lump-sum pension payout: a single big year of income can trigger higher Medicare premiums two years later.

Lump Sum Versus Monthly Payments

Taking the whole pension as one check produces an immediate and often oversized tax bill. The full amount lands in a single tax year and can push you into a much higher bracket. A $200,000 lump sum layered on modest other income can move a single filer from the 22% bracket into the 32% or 35% range.³

You can defer the whole bill by rolling the money directly into an IRA or another qualified plan. In a direct rollover, the administrator sends the funds straight to the new account, nothing is withheld, and nothing is taxed until you eventually take money out.⁹

If the plan cuts a check to you personally instead, it must withhold 20% for federal tax off the top, and you cannot waive that.¹⁰ You still have 60 days to roll the money into an IRA, but to complete a full rollover you have to replace the withheld 20% from other savings. Whatever you do not roll over is taxable income, plus the 10% early-distribution penalty if you are under 59½.

State Taxes on Pension Income

State treatment varies more than federal treatment. Nine states have no personal income tax at all, so pensions escape state tax there: Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming. Several other states have an income tax but fully exempt retirement income from it.

Among states that do tax pensions, most soften the hit somehow. Typical approaches include a flat dollar exclusion (a first $10,000 or $20,000 of retirement income free of tax), an age-based deduction that grows once you turn 65, or an income-based phase-out that shrinks the break for higher earners. The specific numbers change often, so verify your state’s current rules before relying on any figure.

Government and Military Pensions

Many states treat government and military retirement pay more generously than private pensions, either fully exempting it or offering a larger exclusion. If you draw both kinds of pension, each stream can face a different state rate or exemption.

Moving States in Retirement

Federal law bars a state from taxing the pension of someone who no longer lives there.¹¹ Only your current state of residence can tax the payments. Earn the pension in a high-tax state, retire to a no-tax state, and the old state cannot follow you. Hold onto residency proof in your new state (driver’s license, voter registration, primary home records) to head off any dispute.

Controlling What Gets Withheld

How much comes out of each pension check for federal tax depends on the form you file with the payer. Getting withholding right is how you avoid both a surprise bill in April and an underpayment penalty.

For ongoing monthly or quarterly payments, submit Form W-4P to your plan administrator. It lets you set your filing status and account for other income or deductions so withholding matches your real tax picture. Skip it and the payer treats you as single with no adjustments, which usually overshoots.¹²

For one-time withdrawals, Form W-4R applies. The default rate is 10% of the taxable amount, and you can pick any rate from 0% to 100%.¹³ For an eligible rollover distribution paid to you rather than to a new retirement account, 20% is mandatory and cannot be reduced.¹⁰

You avoid an underpayment penalty if your withholding plus any estimated payments covers at least 90% of the current year’s tax or 100% of last year’s, whichever is smaller, or if you owe under $1,000 after withholding and credits. If withholding is running short, either file a new W-4P asking for more, or send quarterly estimated payments with Form 1040-ES. Retirees who turned 62 or older in the tax year or the year before may qualify for a waiver of the penalty if the shortfall came from reasonable cause rather than neglect.¹⁴

1
Internal Revenue Service. Publication 575 (2025), Pension and Annuity Income
2
Internal Revenue Service. Topic No. 410, Pensions and Annuities
3
Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026
4
Office of the Law Revision Counsel. 26 USC 72 – Annuities; Certain Proceeds of Endowment and Life Insurance Contracts
5
Internal Revenue Service. Retirement Topics – Exceptions to Tax on Early Distributions
6
Internal Revenue Service. Publication 915 (2025), Social Security and Equivalent Railroad Retirement Benefits
7
Social Security Administration. Must I Pay Taxes on Social Security Benefits
8
Centers for Medicare & Medicaid Services. 2026 Medicare Parts A and B Premiums and Deductibles
9
Internal Revenue Service. Rollovers of Retirement Plan and IRA Distributions
10
Internal Revenue Service. Topic No. 412, Lump-Sum Distributions
11
Office of the Law Revision Counsel. 4 USC 114 – Limitation on State Income Taxation of Certain Pension Income
12
Internal Revenue Service. 2026 Form W-4P – Withholding Certificate for Periodic Pension or Annuity Payments
13
Internal Revenue Service. 2026 Form W-4R – Withholding Certificate for Nonperiodic Payments and Eligible Rollover Distributions
14
Internal Revenue Service. Estimated Taxes