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6 States That Are Taxing Retirees Less in 2023

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Alabama State House in Montgomery
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Filed your 2022 tax return yet? If you haven’t, there are just two months left to settle up for last year.

As for the 2023 tax year — the one for which your return is due in spring 2024 — some retirees might just find their state tax refund will be bigger, or their state tax bill smaller. According to a recent Tax Foundation report, in a handful of states, certain types of retirement income earned in 2023 will not be taxed the same as retirement income from 2022.

Here’s the scoop on the states that have lowered taxes on certain types of retirement income for 2023.

Alabama

Montgomery Alabama
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With the passing of House Bill 162 in 2022, Alabama Gov. Kay Ivey signed into law a new exemption for seniors. Taxpayers age 65 and older will receive a tax exemption for the first $6,000 of their taxable retirement starting in 2023. That essentially means they will owe no state taxes on the first $6,000 of their retirement income.

Delaware

Delaware Capitol
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In the state of Delaware, a law passed in 2022 increased the state’s partial exclusion of pension income for younger military retirees.

For those over the age of 60, the exclusion is still worth $12,500. But for those under the age of 60, $12,500 of their military pension income can be excluded from their taxable income as of 2023, essentially meaning they, like older military retirees, won’t owe state taxes on the first $12,500 of their pension income. Previously, this exclusion was worth only $2,000 for military retirees under age 60.

Delaware is one of 35 states to fully or partially exclude military retirement income from taxes, according to the state’s Democratic caucus.

Iowa

Des Moines, Iowa
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Iowa House File 2317, signed into law in 2022, offers some great news to residents 55 years of age or older as well as disabled and widowed residents. The law enables them to exclude various types of retirement income, which the state has listed on its Retirement Income Tax Guidance webpage, starting in 2023.

Married residents who file a joint state tax return can exclude all their eligible retirement income if both spouses meet at least one of the requirements mentioned above.

Rhode Island

Rhode Island Capitol
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This state made two major changes to how retirement income is taxed that went into effect this year.

The first makes military pensions completely exempt from state taxes.

For those residents who have other sources of federally taxed retirement income — such as pensions, 401(k) plans and annuities — up to $20,000 is exempt from state taxes. This is an increase, up from $15,000 for the 2022 tax year. Taxpayers must, however, have reached full retirement age as defined by Social Security Administration.

Nebraska

Lincoln, Nebraska capitol building
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This tax year, eligible Nebraska residents can reduce their federal adjusted gross income (AGI) by 60% of their Social Security income that’s included in their federal AGI. This will have the effect of lowering their state income taxes because their federal AGI is also the starting point that Nebraska uses to calculate residents’ state income taxes.

Although this tax break took effect starting with the 2022 tax year, for which taxes are paid this year, Nebraska Legislative Bill 873 phases it in over a period of years, so it’s worth more for the 2023 tax year. It will continue to increase until 2025, when eligible residents can reduce their federal AGI by 100% of their Social Security income included in their federal AGI.

Virginia

Virginia Capitol
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In 2022, Virginia started introducing a subtraction for military retirement pay, then worth up to $10,000, for veterans age 55 or older. The amount that can be subtracted from state taxable income increased to $20,000 for the 2023 tax year and will continue increasing until it reaches $40,000 in 2025.

Virginia added this exemption to a list of others that provide tax benefits for service members and their families.

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