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Road to retirement


Whether you're on the entry ramp or the leisure exit, these tips can ease your retirement journey.

State retirement income tax breaks

When you're searching for a place to retire, a location's taxes are certainly an important consideration, because they could take a big bite out of your retirement resources.

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To varying degrees, many states offer breaks for older or retired residents.

Below is a look at some key tax-preference provisions for 20 states, assembled from data collected by CCH Tax and Accounting, in Riverwoods, Ill., as they apply to retirement income. "The list reflects all the significant state provisions, but with 41 states imposing an individual income tax, it's always possible that a provision or policy quirk in a particular state may not appear on the radar screen," says John Logan, senior tax analyst with CCH Tax and Accounting.

State Tax Breaks for Retirees
State Tax-favorable provision
Arkansas: Up to $6,000 in pension income is exempt.
Colorado: Taxpayers 55 through 64 years old can exclude up to $20,000 ($24,000 for taxpayers 65 and over) in pension and annuity income.
Delaware: Taxpayers under 60 may deduct pension amounts of up to $2,000 and those 60 or over, up to $12,500. Eligible amounts for taxpayers 60 or over include retirement income (dividends, capital gains realization, interest and rental income).
Georgia: Taxpayers 62 or older may exclude up to $15,000 of retirement income (earned income limited to $4,000).
Hawaii: Distributions derived from employer contributions to pensions and profit-sharing plans are exempt.
Illinois: Income from federally qualified retirement plans and IRAs, as well as payments from businesses to retired partners, is excluded.
Iowa: Married taxpayers filing joint returns may exclude up to $12,000 (half that for unmarried taxpayers) of retirement benefits.
Kentucky: Inflation-adjusted amounts of IRA and pension distributions are exempt. The 2004 exemption amount was $40,200.
Louisiana: Up to $6,000 of pension and annuity income, of taxpayers 65 and over, is exempt.
Maryland: Up to $20,700 in pension income (except income from IRAs, SEPs or Keoghs) is excludable for taxpayers age 65 and over.
Michigan: Up to $38,550 in pension income is deductible on a single return ($77,100 on a joint return).
Montana: $3,600 of pension income is exempt for filers with income up to $30,000. For income in excess of that, the $3,600 exemption amount is reduced. Disabled retirees may be able to exclude income up to $5,200.
New Jersey: Taxpayers 62 or older may exclude up to $20,000 of pension income or IRA withdrawals if they are married and filing jointly ($10,000 if married and filing separately). The exclusion is $15,000 for a single taxpayer.
New York: Exempts distributions from all government (federal, state and local) pensions, as well as Social Security and Tier 1 railroad retirement benefits. In addition, for taxpayers 59½ and older, $20,000 of private pension income also is exempt.
Ohio: Taxpayers 65 and over may claim a credit for lump-sum distributions from retirement, pension or profit-sharing plans equaling $50 multiplied by the expected remaining life years. Also, recipients of retirement benefits may claim a credit ranging from $25 to $200, depending on the amount of benefit received during the year.
Oklahoma: $7,500 of retirement income from private pensions is exempt for taxpayers 65 and over who have adjusted gross income of $37,500 or less as a single taxpayer ($75,000 or less for married filers). In 2006, the exemption will increase to $10,000.
Oregon: Taxpayers 62 and over may claim a credit for pension income from public or qualified private pension benefit plans in the amount of the lesser of 9 percent of the individual's net pension income or the individual's Oregon personal income tax liability.
Pennsylvania: Pension income is not taxed.
South Carolina: Taxpayers receiving retirement income may deduct up to $3,000. Taxpayers 65 and older may deduct up to $10,000.
Utah: For taxpayers under 65, up to $4,800 in retirement benefits from pensions, annuities and Social Security is exempt, increasing to $7,500 for those 65 and older. The exemption amount is reduced (50 cents for each $1 of adjusted gross income over a certain limit) and the limits are set according to filing status: $32,000 for married taxpayers filing joint returns; $16,000 for married taxpayers filing separate returns and $25,000 for individual taxpayers.

In addition to these general provisions, some states also exempt Social Security and certain railroad retirement benefits; New York, as cited above, is not alone in offering retirees this break. Others don't tax disability pensions or military benefits. And several states exclude a combination of these various types of pension income from state taxation. To make sure you qualify for any and every retirement income tax break offered by your state, consult your state's revenue department, as well as your personal tax adviser.

Many states also offer property tax breaks for older residents. Check with your local property assessor for more details on tax help here. Information on how to contact both your state tax department and local property tax officials can be found in Bankrate's state tax directory.

-- Posted: Nov. 7, 2005
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