State Tax on Federal Law Enforcement Pensions: What LEO Retirees Owe

Federal LEO Pensions and State Income Tax

The taxable portion of your FERS annuity is subject to federal income tax. Whether it is also subject to state income tax depends on where you establish legal residence after retirement. The variation is enormous — from zero state tax in Texas, Florida, and Nevada to rates above 10% in California and New Jersey.

For a retiring LEO with a $40,000 annual pension, the difference between a tax-free state and a high-tax state can exceed $4,000 per year. Over a 30-year retirement, that is $120,000 or more in cumulative state tax.

States With No Income Tax

Nine states impose no broad-based personal income tax, including on federal pensions:

Alaska, Florida, Nevada, New Hampshire (its interest and dividends tax was repealed effective January 1, 2025), South Dakota, Tennessee, Texas, Washington, and Wyoming.

If you relocate to any of these states, your FERS annuity, FERS Supplement, Social Security, and TSP withdrawals are all free of state income tax.

States That Specifically Exempt Government Pensions

Several states that do impose income tax provide full or partial exemptions for federal government retirement benefits. The details vary — some exempt all government pensions, others cap the exemption at a dollar amount or age threshold.

States with full or substantial federal pension exemptions include Alabama, Hawaii, Illinois, Kansas (federal civil-service retirement benefits are exempt), Louisiana, Massachusetts, Michigan, Mississippi, New York (federal pensions are fully exempt), and Pennsylvania.

Alabama and Pennsylvania are particularly notable for LEO retirees: both fully exempt all government retirement income from state tax regardless of amount, and both also exempt Social Security benefits. An officer with a combined $65,000 in FERS annuity and Social Security owes zero state income tax in either state.

Illinois exempts all federally taxed retirement income — FERS annuity, Social Security, and TSP distributions — from state income tax. For LEOs considering a second career in the Chicago area, this makes Illinois more tax-favorable than its top marginal rate of 4.95% would suggest.

States That Tax Federal Pensions

Most states with an income tax do tax federal pensions to some degree. The states where LEO retirees face the highest effective tax burden on pension income include California, Connecticut, Minnesota, Montana, Nebraska, New Jersey, Oregon, Vermont, and Wisconsin.

California's top marginal rate reaches 13.3%. For example, a single filer with $42,000 of fully taxable pension income using the 2025 standard deduction has $36,294 of taxable income, in the 4% marginal bracket; the state income tax is about $816 before credits.

The FERS Supplement and State Tax

The FERS Special Retirement Supplement is treated as ordinary income by the IRS, and states that tax federal pensions generally tax the supplement identically. In states that specifically exempt government pensions but not all income, the supplement's treatment varies — in most states it qualifies as a government retirement benefit and falls under the pension exemption, but confirm with your state's revenue department.

The supplement ends at age 62, so your state tax picture shifts at that point as Social Security income replaces it. States that exempt Social Security (most do, at least partially) may produce a lower overall state tax burden after 62 than before.

TSP Withdrawals and State Tax

TSP distributions are generally taxable as ordinary income at the federal level, and most states that tax income also tax TSP withdrawals. The penalty-free access available to LEOs separating at age 50 or later does not change the federal tax treatment — it only removes the 10% federal penalty. State tax applies if your state taxes those distributions and does not exempt them.

Qualified Roth TSP distributions are federally tax-free (after age 59½ and the five-year holding period); check your state's rules before assuming the same state tax treatment. An LEO retiree living in a state that taxes pensions may be able to use Roth TSP withdrawals to supplement income without increasing the state tax bill.

Choosing Where to Retire

Relocation decisions involve far more than tax rates, but the numbers are worth running. OPM's annuity payments include a W-4P federal withholding election but do not withhold state income tax automatically. You can request state withholding through OPM if your state participates; otherwise, you may need to make estimated state tax payments.

If you are considering relocation, compare the total tax burden — state income tax on pension, Social Security, and TSP income combined — rather than looking at any single exemption. A state that exempts pensions but taxes TSP withdrawals at a high rate may not save much if you are drawing down your TSP aggressively.

The Federal LEO Retirement Guide includes a Post-Retirement Income Planner that maps your income sources year by year and projects the state tax impact for your planned retirement state.

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