A pension is almost always considered income. Whether a pension is taxable depends on the type of pension and where you live.
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Does the IRS tax pensions?
The IRS taxes most pensions.
For employer-funded pensions, paying taxes makes sense. A pension is basically deferred wages, and you have to pay taxes on wages.
If you contribute to your pension, it works similarly to an IRA.
If you contributed pre-tax dollars or didn’t pay taxes on the money you put into your pension, you’ll have to pay taxes when you take your pension.
If you contributed post-tax dollars or already paid taxes on the money you contributed to your pension, you can avoid taxes on part of your pension. When you file your tax return, you’ll complete a form that determines what portion of your pension payments were from your post-tax contributions.
Do survivors pay taxes on a pension?
Survivors, such as a spouse or child, of someone with a pension will usually pay taxes if the original beneficiary would have had to pay taxes.
A common situation is when a pension allows a spouse to continue receiving payments after the original retiree dies.
If you receive money from a pension through an estate instead of directly, the estate tax rules may apply and you may not have to pay personal income taxes on the pension.
What about cashing in a pension early?
When you cash in a pension early, you will usually have to pay taxes in the same way you would have if you were retired.
Cashing in a pension early can push you into a much higher tax bracket compared to taking regular payments or your normal income. For example, if you cash out a pension for $250,000, you’ll add $250,000 to your taxable income in the year you cashed it out.
In some cases, you may also have to pay an additional 10% penalty if you cash in your pension before retirement age. Talk to your tax advisor before deciding whether to cash in a pension.
Is a pension considered income for Social Security?
Pension payments generally aren’t subject to Social Security tax. They also generally won’t increase your Social Security earnings record.
A pension may increase your income for the purposes of determining whether your Social Security is taxable due to your total income. However, it generally won’t lower your Social Security retirement benefits.
Is a pension earned income?
A pension is generally not considered earned income.
This means you typically can’t use a pension to qualify for tax benefits that require earned income such as the Earned Income Tax Credit. You also can’t contribute to an IRA with pension funds.
Do states tax pensions?
Some states tax pensions similarly to the IRS. Others have different rules such as
- Exempting all pensions
- Exempting certain pensions like state retirement plans
- Not taxing pension payments below a certain amount
- Not tax pension payments if your total income is below a certain amount
Of course, if a state doesn’t have an income tax, you won’t owe state taxes on your pension.
Does California tax pensions?
California taxes most pensions. It generally treats the full amount of pension payments as regular income subject to the state income tax.
Does Florida tax pensions?
Florida has no state income tax at all so it doesn’t tax pensions.
Does New York tax pensions?
New York generally does not tax pensions from the federal government, New York state or local governments, and certain other public authorities.
New York typically does tax private pensions and out-of-state pensions.
If you are age 59.5 or older during the year, you may be eligible to exclude up to $20,000 of taxable pensions payments. That means if you have a $30,000 per year pension, you may only have to pay taxes on $10,000 per year.
Does Virginia tax pensions?
Virginia taxes most pensions like ordinary income.
Virginia generally doesn’t tax Tier 1 Railroad Retirement or Social Security benefits even if you have to pay federal taxes on those benefits.