Pension income is taxable as ordinary income at the federal level, and in most states

When you receive a pension payment, the IRS treats it as taxable income. You report it on your tax return the same way you would report wages from a job. The amount you owe in federal income tax depends on your total income for the year, your filing status, and your age.

State tax treatment varies. Some states do not tax pension income at all. Others tax all pensions. A few states tax only pensions from government employers, or only pensions from private employers. You need to check your specific state's rules, because a pension that is tax-free in one state may be fully taxable in another.

The pension payer — your former employer or the pension fund administrator — will send you a Form 1099-R each January showing how much you received in the prior year. You use this form to report the income on your tax return.

Key Takeaways

  • Federal income tax applies to all pension payments unless the pension is from a Roth account, which is rare for traditional pensions.
  • State income tax on pensions depends on where you live; some states exempt all pension income, while others tax it fully.
  • Your pension payer sends you a Form 1099-R each January, which you use to report the income when you file taxes.
  • If you are over 65, you may be able to claim an additional standard deduction that reduces the amount of pension income you actually pay tax on.
  • You can request that your pension payer withhold federal income tax from each payment, which reduces the amount you receive but also reduces what you owe at tax time.

How federal income tax is calculated on pension payments

Your pension is added to all your other income for the year — Social Security, interest, rental income, or anything else you earned. The total is your taxable income (after you subtract the standard deduction or itemized deductions). You then pay tax on that amount using the federal tax brackets for your filing status.

The tax rate you pay depends on how much total income you have. If your pension is your only income and it is modest, you may owe little or no federal tax. If you have a large pension plus other income, you will be in a higher tax bracket and pay a higher rate on the combined total.

If you are 65 or older, you can claim an additional standard deduction beyond the regular one. For 2024, the additional deduction is $1,850 if you are single, or $1,500 if you are married filing jointly. This reduces your taxable income and the tax you owe.

State income tax on pensions: which states tax, which do not

Nine states have no income tax at all: Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, Wyoming, and New Hampshire (which taxes only interest and dividends, not wages or pensions). If you live in one of these states, you owe no state income tax on your pension.

Most other states tax pension income as ordinary income. However, some states offer partial or full exemptions for certain types of pensions. Illinois, for example, exempts all pension income. Mississippi exempts military pensions. Pennsylvania exempts all pensions from private employers but taxes government pensions. The rules are specific to each state and sometimes to the type of employer or the year you retired.

If you receive a pension from a state other than where you now live, you may owe tax to both states. Some states have reciprocal agreements that prevent this, but you should verify your situation with your state tax authority or a tax professional, especially if you moved after retiring.

Tax withholding: letting your pension payer deduct taxes upfront

When you start receiving your pension, you can fill out a W-4P form (Withholding Certificate for Pension or Annuity Payments) to tell your pension payer how much federal income tax to withhold from each payment. This works the same way as withholding from a paycheck.

If you request withholding, the pension payer deducts the tax from your payment before sending you the money. This reduces the amount you receive each month, but it also reduces what you owe when you file your tax return. Many people choose withholding to avoid a large tax bill in April.

If you do not request withholding, you receive the full pension payment, but you are responsible for paying the tax yourself — either through quarterly estimated tax payments or by paying the full amount when you file your return. Some people prefer this because they want the full payment now and can afford to pay the tax later.

Social Security and pension income together

If you receive both a pension and Social Security, the two interact in a specific way for tax purposes. Up to 85 percent of your Social Security benefits may be taxable, depending on your combined income (which includes your pension, plus half your Social Security, plus any other income). This can push you into a higher tax bracket than your pension alone would.

The calculation is complex, and the threshold amounts depend on your filing status. If you are single and your combined income exceeds $25,000, some of your Social Security becomes taxable. If you are married filing jointly, the threshold is $32,000. These thresholds have not changed since 1984, so they affect more retirees now than they did decades ago.

A tax professional or the IRS can help you calculate how much of your Social Security is taxable given your specific income. Some people use this information to decide whether to delay their pension or Social Security to manage their tax burden.

Roth pensions and other tax-free pension sources

Most traditional pensions are taxable. However, if you have a Roth pension — which is uncommon but does exist — the withdrawals are tax-free. Roth pensions work like Roth IRAs: you paid tax on the money when you contributed it, so you do not pay tax again when you withdraw it in retirement.

Some government employees and certain military personnel may have access to Roth pension options, but these are rare. If you are unsure whether your pension is a Roth or a traditional pension, check your pension statement or contact your pension administrator.

If you receive a pension from a government employer and also have a Government Pension Offset that reduces your spousal or survivor Social Security benefits, that offset does not change the tax treatment of the pension itself — the pension is still taxable.

What to do when you receive your Form 1099-R

Each January, your pension payer sends you a Form 1099-R showing the total pension payments you received in the prior year, the amount of federal tax withheld (if any), and other information. You use this form to report your pension income on your tax return.

Box 1 of the Form 1099-R shows the gross pension amount. Box 4 shows federal income tax withheld. If you withheld taxes, the amount in Box 4 is credited against your total tax liability for the year. If you did not withhold, you owe the full tax on the amount in Box 1.

Keep your Form 1099-R with your tax records. If you file electronically, you do not mail the form to the IRS, but you must have it available if the IRS asks questions about your return.

Frequently Asked Questions

Do I have to pay taxes on my entire pension payment?

Yes, unless your pension is from a Roth account (which is rare). The full amount is taxable income. However, you can reduce the amount you actually pay tax on by claiming the standard deduction or itemized deductions, and by claiming an additional deduction if you are 65 or older.

What if I move to a state with no income tax after I retire?

You will owe no state income tax on your pension going forward. However, if you were a resident of another state when you earned the pension, that state may still try to tax it. Some states tax pensions earned by their former residents even after they move away. Check with your new state's tax authority to confirm your situation.

Can I reduce my pension taxes by splitting my pension between two years?

No. You must report the pension income in the year you receive it. However, if you are still working and have not yet started your pension, you can choose when to start it, which may allow you to manage your income across years. Once you start receiving payments, you report them as received.

What happens if my pension payer withholds too much tax?

You will receive a refund when you file your tax return. If too little tax is withheld, you will owe more. You can adjust your withholding by submitting a new W-4P form to your pension payer at any time.

Is my military pension taxed differently?

Federal income tax applies to military pensions the same way it applies to other pensions. However, some states exempt military pensions entirely. Check your state's rules. Military pensions are also not subject to the Government Pension Offset if you also receive Social Security, though other government pensions may be.