Minnesota, Vermont, North Dakota, and West Virginia use similar tax rules as the IRS does when it comes to taxing your pension. Therefore, if you reside in any of these states, you will end up paying the normal income tax rates, if your pension is taxed, which is up to 85% of your pension. The other states, among the thirteen listed above, use IRS rules to tax pensioners, but they also offer exemptions or deductions based on income or age. Therefore, it is more than likely that you won’t have to pay tax on your pension for the full amount. Thirty-seven other states, including Washington DC, do not tax anyone’s Social Security benefits.
Before 2014, the state of Iowa was known for assessing taxes on people’s Social Security benefits. However, the process was phased out completely. In New Mexico, Social Security benefits were exempted for pensioners who were 65 years old and over. The other thirteen states use various methods of tax pensioner’s benefits and this includes the use of adjusted gross income as discussed earlier.