If you want to keep your full federal annuity, more than half the country will let you. Nine states levy no personal income tax at all, roughly a dozen more fully exempt federal pensions from state tax, and several others offer deductions large enough to zero out the bill for most retirees. Those are the states that don’t tax federal retirement income in any practical sense, and the differences among them come down to what else you have coming in and how old you are when you file.
States With No Personal Income Tax
The cleanest option is a state that taxes no personal income to begin with. Nine qualify: Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming. No income tax means no state return, no exemption to claim, and no rule change on a specific benefit type that can catch you off guard later.
New Hampshire is the newest addition. It previously taxed interest and dividend income at a declining rate, and that tax was fully repealed for tax years beginning after December 31, 2024.1NH Department of Revenue Administration. Interest and Dividends Tax Wages, pensions, and retirement distributions were never taxed there. Washington imposes a capital gains tax on certain investment income above $270,000, but retirement distributions are outside that tax.
These states fund themselves through sales, property, and severance taxes. Property taxes in Texas and sales taxes in Tennessee run high, so the trade-off is real. For a retiree whose main income is a federal annuity, the absence of an income tax usually wins the arithmetic anyway.
States That Exempt All Retirement Income
A second group does levy an income tax but carves every kind of retirement income out of it. Federal pensions, private 401(k) distributions, state pensions, and Social Security all escape. For a federal retiree, the outcome matches living in a no-income-tax state.
Illinois excludes federally taxed retirement income from its individual income tax, which covers CSRS and FERS annuities along with private pensions and Social Security. Mississippi exempts all qualified retirement income. Pennsylvania reaches the same result differently: its personal income tax applies only to eight classes of income, and taxable “compensation” specifically excludes payments recognized as retirement benefits paid after reaching a stated age or completing a stated period of employment.2Pennsylvania General Assembly. Pennsylvania Statutes Title 72 Taxation and Fiscal Affairs 7301
Iowa joined this group starting with the 2023 tax year. Residents aged 55 or older, those who are disabled, and surviving spouses of someone who qualified can exclude all retirement income from Iowa taxable income.3Iowa Department of Revenue. Retirement Income Tax Guidance The age-55 threshold is lower than most states use, so federal retirees who leave under early retirement provisions typically qualify right away.
Michigan rounds out the group for tax year 2026. The state’s Lowering MI Costs Plan restored its pre-2012 pension subtraction through a four-year phase-in, and for 2026 and beyond the subtraction reaches 100 percent of qualifying retirement and pension benefits.4State of Michigan. Retirement and Pension Benefits Returns filed for 2023 through 2025 may have received only a partial subtraction depending on birth year. That restriction lifts in 2026.
States That Fully Exempt Federal Retirement Pay
A third group taxes private-sector pensions and 401(k) distributions but grants a complete exemption specifically for government retirement, including federal pensions. The distinction matters when you have a mix of income sources: your FERS annuity escapes tax, but an IRA distribution or private pension might not.
Alabama’s tax code lists income from the U.S. Government Civil Service Retirement and Disability Fund, the Foreign Service Retirement and Disability Fund, and any other federal government retirement fund among its individual income tax exemptions.5Alabama Legislature. Alabama Code 40-18-19 – Exemptions – Generally Hawaii excludes from gross income any compensation received as a pension for past services, and its administrative rules name benefits paid under the federal Civil Service Retirement Act as qualifying.6Justia. Hawaii Code 235-7 – Other Provisions as to Gross Income, Adjusted Gross Income, and Taxable Income
Kansas allows a full subtraction for federal civil service retirement and disability payments included in federal adjusted gross income.7Kansas Department of Revenue. Schedule S – Part A Subtractions Louisiana exempts any income received through a retirement system for retirees of the United States Government.8Justia. Louisiana Revised Statutes 47:44.2 – Federal Social Security Benefits and Federal Retirement Benefits Exempt From State Income Tax
Massachusetts excludes distributions from federal employee contributory pension plans from state gross income, and the exclusion extends to surviving spouses who receive the pension after the retiree’s death.9Mass.gov. Tax Treatment of Government Pensions in Massachusetts New York subtracts from adjusted gross income all pensions paid to officers and employees of the United States or any federal agency, to the extent those pensions are included in federal taxable income.10New York State Senate. New York Tax Law 612 – New York Adjusted Gross Income of a Resident Individual Missouri moved to fully exempt public pension income in recent years through a phased deduction, and federal retirement distributions now qualify for a complete subtraction on the state return.
In each of these states, the exemption applies because of the payment’s source, meaning the U.S. government as an employer, not because of the type of retirement plan. Confirm that your Form 1099-R correctly identifies the payment as a federal government pension before you claim the subtraction.
States With Partial Exemptions Worth Considering
Several states offer deductions that cover a portion of retirement income rather than all of it. For many federal retirees, the caps are large enough to zero out the state tax bill anyway.
Georgia is the most generous. Residents aged 65 and older can exclude up to $65,000 of retirement income per person, while those aged 62 to 64 can exclude up to $35,000.11Georgia Department of Revenue. Retirement Income Exclusion Married couples filing jointly can each claim the full amount if both receive retirement income.12Georgia Department of Audits and Accounts. Tax Incentive Evaluation: Retirement Income Exclusion A couple both aged 65 or older can shield up to $130,000, which covers the vast majority of federal annuities.
Kentucky allows a retirement income exclusion that is indexed annually. For 2024, the cap was $31,110 per taxpayer. Check the Kentucky Department of Revenue’s current instructions for the year you’re filing.
South Carolina provides a retirement income deduction of up to $3,000 before age 65 and up to $10,000 starting at age 65. Residents who turn 65 also qualify for a separate $15,000 deduction against any South Carolina income, reduced by whatever was claimed under the retirement deduction.13South Carolina Department of Revenue. Retirees – Lower Your Individual Income Tax Bill With These Five Tips The effective maximum for a retiree aged 65 or older is $15,000.
Virginia takes a different approach with an age deduction of up to $12,000 for residents aged 65 and older. Those born on or before January 1, 1939 get the full $12,000 regardless of income. For those born after that date but before January 2, 1960, the deduction drops by one dollar for every dollar of adjusted federal AGI above $50,000 (single) or $75,000 (married).14Virginia Tax. Subtractions A federal retiree with a comfortable annuity can see this deduction phase out entirely.
What Actually Counts as Exempt Federal Retirement Income
State exemptions for federal retirement income do not cover every dollar the government sends you when you leave service. Getting the distinctions wrong can generate a notice from the state revenue department.
CSRS and FERS Annuities
Monthly annuity payments under the Civil Service Retirement System or the Federal Employees Retirement System are the core benefit every state exemption covers. Survivor annuities paid to a spouse after a federal retiree’s death generally qualify the same way. Massachusetts explicitly extends its exclusion to surviving spouses.9Mass.gov. Tax Treatment of Government Pensions in Massachusetts
Thrift Savings Plan Distributions
The TSP is where the exemption can quietly stop applying. The TSP is a federal retirement plan, but it’s a defined contribution plan, functionally similar to a private-sector 401(k), not a government pension. States that exempt all retirement income (Illinois, Iowa, Pennsylvania) cover the TSP by default. States whose exemption language specifically targets federal civil service retirement or disability payments, like Kansas, may not.7Kansas Department of Revenue. Schedule S – Part A Subtractions If you live in a state with a federal-pension-specific exemption, verify TSP treatment before assuming it’s sheltered. The TSP itself does not withhold state taxes, so this falls on you.15Thrift Savings Plan. Tax Rules About TSP Payments
Lump-Sum Annual Leave Payments
When you retire, you receive a lump-sum payment for unused annual leave. It’s compensation for earned leave, not a pension, and it appears on your final W-2 rather than on a 1099-R. States that exempt federal retirement income do not exempt this payment because it’s classified as wages. Plan for the hit in the year you separate; it can be a five-figure amount that lands entirely in your taxable column.
Verify Before You File
State tax laws change often. Iowa’s exemption only took effect in 2023. Michigan’s full subtraction only reaches 100 percent in 2026. Legislatures adjust caps, age thresholds, and phase-outs regularly, sometimes mid-cycle with little public attention. Before you file, check the current instructions for the retirement income subtraction line on your state return rather than a summary article, because that’s where the actual dollar limits and qualifying criteria live for the year you’re filing.
When reviewing your 1099-R, confirm that Box 1 shows the correct gross distribution and that the distribution code in Box 7 identifies it as a government pension. Filing with incorrect codes can cause a state’s automated system to deny the exemption and generate a bill you then have to dispute.