States may not tax your pension, but the feds will

Q: I am retir­ing from the fed­eral gov­ern­ment. I know Texas has no state income tax, but I have also been told that fed­eral pen­sions are exempt from fed­eral income tax if you live in Texas.

 –Dorothy, (not in) Texas

A: Not so, Dorothy! There is no way for you to escape pay­ing fed­eral income taxes on your pen­sion. USAA and Mil​i​tary​.com con­ducted a Best Places for Mil­i­tary Retire­ment sur­vey at the end of last year. Not sur­pris­ingly, top­ping the list was sev­eral Texas loca­tions. As you note, the fact that Texas has no state income taxes is a real ben­nie!  How­ever, as great a state as Texas is, it does not pro­vide any relief from your fed­eral income tax oblig­a­tions. In your case, your gov­ern­ment pen­sion would still be sub­ject to fed­eral income tax.

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3 responses to “States may not tax your pension, but the feds will”

  1. If my pen­sion does not come from a fed­eral job, does the pen­sion still have to pay fed­eral taxes in TEXAS?

  2. All pen­sions — civil­ian, mil­i­tary or gov­ern­ment — are sub­ject to fed­eral income taxes. But some states, like Texas, don’t have a state income tax, and there­fore, your retired pay is state tax free. Still oth­ers, like Penn­syl­va­nia, opt not to tax retired pay.

  3. How can I find out if I’m enti­tled to vet­erens pen­sion benefits

USAA or its affiliates do not provide tax advice. Taxpayers should seek advice based upon their own particular circumstances from an independent tax advisor. The information is provided for informational purposes only and is not intended to substitute for obtaining professional financial advice. Please thoroughly research and seek professional representation before acting on any information you may have found in this article. This article is in no way attempts to provide advice that relates all personal circumstances.

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Scott Halliwell and JJ Montanaro are CERTIFIED FINANCIAL PLANNER™ practitioners with USAA Financial Planning Services, one of the USAA family of companies. Certified Financial Planner Board of Standards, Inc. owns the certification marks CFP® and Certified Financial Planner™ in the United States, which it awards to individuals who successfully complete CFP Board's initial and ongoing certification requirements.

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