The best part of being retired is no doubt the freedom of movement. This freedom allows retirees to live wherever they want and to move whenever they want. (Oh, the joy!) They may decide to move to someplace warmer, someplace cheaper, or even someplace closer to their kids or grandkids. The fact is that many retirees no longer live in the state where they originally retired.
So what happens when they go to file their tax returns and their 1099-R comes from a state in which they are no longer living? Well, thankfully, the Pension Source Tax Act of 1996 (P.L. 104-95) was enacted to help clear up this issue. This law specifically stipulates that, “No State may impose an income tax on any retirement income of an individual who is not a resident or domiciliary of such State.” In layman’s terms – the only state that can tax your pension income is your resident state!
So, while the state where you earned your pension may not tax your retirement income, the state where you reside can. So go one better! Move to a state with no state income tax like Alaska, Florida, Nevada, South Dakota, Texas, Washington, or Wyoming; or at the very least, move to a state that doesn’t tax pension income like Alabama, Mississippi, or Pennsylvania.