Federal Pension State Tax Exemption: Which States Don't Tax FERS Retirement Income

Federal Tax Treatment Comes First

Before getting to the state-by-state picture, you need to understand how your FERS annuity is taxed at the federal level. Your FERS pension is taxable income reported on Form 1099-R. However, a small portion of each payment represents a tax-free return of your own contributions — the retirement deductions withheld from your pay during your career (0.8% for standard FERS, 3.1% for FERS-RAE, or 4.4% for FERS-FRAE). OPM uses the Simplified Method to calculate how much of each monthly payment is tax-free, spreading your total contributions over your expected payout period based on your age at retirement. Once you've recovered your full contribution amount, the entire annuity becomes taxable.

The W-4P form you file with OPM controls your federal withholding. The FERS retirement tax withholding post covers the mechanics of setting that up correctly. What that post doesn't address is what happens at the state level — and for many federal retirees, the state tax treatment is the bigger variable.

States With No Income Tax

Nine states impose no individual income tax at all, which means your FERS annuity, Social Security, TSP withdrawals, and every other income source are state-tax-free:

• Alaska
• Florida
• Nevada
• New Hampshire (taxes interest and dividends only through 2024; fully repealed for 2025 onward)
• South Dakota
• Tennessee
• Texas
• Washington
• Wyoming

If you live in one of these states, state tax planning for your federal pension is a non-issue. A significant number of federal retirees relocate to Florida or Texas specifically for this reason.

States That Fully Exempt Federal Pensions

Several states that do levy an income tax specifically exempt federal government pension income from state taxation. In these states, your FERS annuity is not included in your state taxable income at all:

• Alabama — all federal retirement benefits exempt
• Colorado — pension and annuity income fully subtracted beginning tax year 2026
• Hawaii — employer-funded pension income (including federal) exempt from state income tax
• Illinois — all retirement income from qualified plans exempt, including federal pensions
• Iowa — retirement income fully exempt for taxpayers age 55 and older (since 2023)
• Kansas — federal retirement benefits fully exempt for Kansas residents (effective 2024)
• Louisiana — all federal retirement benefits exempt
• Massachusetts — federal government pension income exempt
• Michigan — government pension income exempt (subject to income thresholds for younger retirees; fully exempt for those born before 1946)
• Mississippi — all qualified retirement income exempt, including federal pensions
• New York — federal government pension income fully exempt
• Pennsylvania — retirement income from qualified plans not taxable at the state level

The specifics matter. Michigan's exemption, for example, is full only for retirees born before 1946 — younger birth-year cohorts face income thresholds. Always check the current year's thresholds, as these change with state legislative sessions.

States With Partial Exemptions or Deductions

Many states offer partial relief — a dollar amount you can deduct from your retirement income before calculating state tax. These exemptions vary widely:

• Delaware — $12,500 exclusion for pension income for those 60 and older
• Georgia — retirement income exclusion up to $35,000 for ages 62–64, $65,000 for age 65+ (varies by filing status and year)
• Kentucky — government pension income exempt if service began before 1998; post-1997 hires taxed above an exclusion amount
• Maryland — pension exclusion for retirees 65+ or totally disabled (amount set annually; $41,200 for 2025), reduced by Social Security benefits received
• Missouri — public pension income exclusion with income-based phase-outs
• Montana — partial pension and annuity income exemption
• Ohio — retirement income credit (not a full exemption) that reduces state tax liability
• Oklahoma — exclusion of up to $10,000 of retirement income ($20,000 for joint filers), including federal pensions
• Oregon — federal pension income credit for retirees who were federal employees before October 1991 (limited applicability for FERS)
• South Carolina — retirement income deduction of up to $10,000, with additional age-65 deduction
• Virginia — age deduction of $12,000 per person for those 65+ (not pension-specific, but reduces taxable income)
• Wisconsin — no specific pension exemption, but a retirement income subtraction applies to certain qualifying pensions

States That Fully Tax Federal Pensions

The remaining states treat FERS annuity income like any other taxable income, with no special exemption or deduction for government pensions:

• Arizona, Arkansas, California, Connecticut, Idaho, Indiana, Maine, Minnesota, Nebraska, New Jersey, New Mexico, North Carolina, North Dakota, Rhode Island, Utah, Vermont, West Virginia

In these states, your FERS annuity is added to your other income and taxed at the applicable marginal rate. California is the most notable — it has the highest top marginal rate in the country and offers no pension exemption. Federal retirees in California, particularly those with higher annuities combined with TSP withdrawals and Social Security, can face state tax rates above 9%.

Why This Matters for Retirement Planning

The state tax differential on a $30,000 FERS annuity can easily exceed $1,500 per year between a full-exemption state and a full-taxation state. Over a 25-year retirement, that's $37,500 or more in cumulative state tax — real money that compounds when you consider the effect on available income for reinvestment, healthcare costs, or simply maintaining your standard of living.

This doesn't mean you should move to a no-tax state solely for the pension exemption. Property taxes, cost of living, sales tax rates, and quality-of-life factors all weigh on the decision. But if you're already considering a post-retirement relocation, the state tax treatment of your FERS annuity should be one of the variables on the spreadsheet.

For retirees who plan to stay put, the relevant question is whether your state offers any exemption or deduction you're not currently claiming. State tax rules change frequently — Kansas added its full federal pension exemption in 2024, for example — and many retirees file for years without realizing they qualify for a partial exclusion.

Interaction With Social Security and TSP Income

Your total state tax picture isn't just the annuity. Social Security has its own state tax treatment (most states exempt it, but about a dozen partially or fully tax it). TSP withdrawals from a traditional balance are taxable income in virtually every state that has an income tax — and Roth TSP withdrawals are generally tax-free at both the federal and state level.

The combination of all three income streams — FERS annuity, Social Security, and TSP distributions — determines your effective state tax rate. Some states' exemptions phase out above income thresholds, meaning your FERS annuity might be exempt standing alone but partially taxable once your total income crosses a threshold.

The FERS Annuity Guide covers the federal tax mechanics and the annuity calculation inputs you need to get right before separating. For state tax specifics, check your state's Department of Revenue or Taxation website for the current year's pension exemption rules — they move too frequently for any guide to stay current for more than one tax season.

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