State Taxes and Your Federal Annuity: Where NOT to Retire

Published: 2026-06-26 • By: Federal Benefits Exchange

State Taxes and Your Federal Annuity: Where NOT to Retire

Two federal retirees with identical Federal Employees Retirement System (FERS) benefits can end up with a gap of $5,000 or more in annual take-home income simply by living on opposite sides of a state line. Over a 20-year retirement, that difference drains up to $100,000 from your pocket.

Most federal employees spend decades tracking their Thrift Savings Plan (TSP) balances and pension calculations. Yet, they overlook the quietest threat to their retirement budget: state tax residency. If you relocate without checking the tax codes, you might hand a massive chunk of your fixed income back to a state treasury. This is not an abstract financial theory. It translates to real cuts to your travel budget, your medical care, and your peace of mind.

You need to know if your new state taxes your federal annuity, TSP withdrawals, or Social Security. This guide maps out the tax rules for all 50 states so you can make your move with absolute certainty.

Why State Taxes Hit Federal Retirees Differently

Private-sector workers generally retire with a 401(k) and Social Security. For them, state tax treatment is fairly straightforward.

Your situation as a federal retiree is more complex. You draw from three distinct streams: your FERS or Civil Service Retirement System (CSRS) annuity, your TSP withdrawals, and your Social Security. States can tax, exempt, or partially deduct each of these streams independently.

Some states exempt public pensions but tax TSP withdrawals. Others tax pensions but offer generous exclusions. A few tax everything.

Your residency at the time you receive your income determines your tax bill. Where you worked for the federal government does not matter. If you retire from a federal job in Virginia but move to Florida, Virginia cannot tax your pension.

One Protection You Have: States Cannot Discriminate Against Federal Pensions

States have the power to tax your retirement income, but they cannot discriminate against you as a federal retiree. Under the federal non-discrimination statute 4 U.S.C. § 111, states must treat federal retirees at least as favorably as their own state and local government retirees.

The Supreme Court cemented this protection in Davis v. Michigan Department of Treasury (1989) and reaffirmed it in Dawson v. Steager (2019). If a state exempts its retired state police or teachers from income tax, it must extend that same exemption to federal retirees in equivalent positions.

This rule does not make federal pensions tax-free. It simply guarantees equal treatment. If you notice a state taxing your federal annuity while letting its own state retirees off the hook, consult a tax professional. The law is on your side, but you have to enforce it.

The Full State-by-State Picture

Tier 1: States With No Income Tax

Nine states do not tax personal income. If you relocate to one of these states, your FERS annuity, TSP distributions, and Social Security remain completely untouched by state-level income taxes:

Alaska
Florida (verified by the Florida Department of Revenue's Florida Revenue FAQ)
Nevada
New Hampshire (no income tax on wages or retirement, and its interest and dividends tax is phased out)
South Dakota
Tennessee
Texas
Washington (which has no state income tax per the Washington Department of Revenue Forms & publications)
Wyoming

These states offer the cleanest path to preserving your retirement purchasing power. You get exactly what you earned.

Tier 2: States That Fully Exempt Federal Pension Income

These states levy a state income tax but completely exempt federal annuities (FERS and CSRS). However, do not assume this exemption applies to your TSP withdrawals. Treatment can differ significantly:

Alabama — Your federal annuity is fully exempt. However, the state taxes TSP distributions as ordinary income at rates up to 5%.
Hawaii — Your federal pension is exempt from state tax. However, the state taxes TSP distributions as ordinary income.
Illinois — The state imposes a flat 4.95% income tax. However, it fully exempts qualified pension income, including both federal annuities and TSP distributions (see the Illinois Department of Revenue Publication 120).
Iowa — Federal government and military pensions are tax-exempt. Other retirement income is taxable, though recent legislation has lowered rates significantly.
Kansas — The state exempts Social Security and federal pension income for most retirees.
Louisiana — Retirees age 65 and older can exclude up to $6,000 of federal retirement income for single filers, and $12,000 for joint filers. Military pensions are fully exempt.
Massachusetts — The state exempts contributory public pensions, including CSRS. However, FERS annuities and TSP withdrawals are often partially taxable. Review this state with extreme care.
Michigan — Public pensions, including federal annuities, are fully exempt for retirees born before 1946. Younger retirees receive smaller exemptions (see the Michigan Treasury's Retirement and Pension Benefits page).
Mississippi — The state fully exempts all retirement income, including FERS annuities and TSP distributions.
New York — FERS and CSRS annuities are entirely exempt. If you are 59½ or older, you can exclude up to $20,000 of TSP distributions. The state taxes any TSP withdrawals above that limit at ordinary tax rates (see the New York State Department of Taxation and Finance IT-201 Instructions and Information for retired persons).
Pennsylvania — The state has a flat 3.07% income tax but exempts all qualified retirement income, including federal annuities and TSP distributions.

Tier 3: States With Significant Partial Exemptions

These states tax retirement income but offer deductions that can offset most or all of your tax liability:

Georgia (see the Georgia Department of Revenue's Retirement Income Exclusion guidelines and Retirees FAQ) — Georgia is highly tax-friendly for federal retirees. If you are aged 62 to 64, you can exclude up to $35,000 of retirement income per person. At age 65 or older, this exclusion jumps to $65,000 per person. A married couple can shield $130,000 of combined retirement income from Georgia income tax. At Georgia's flat rate of 5.19%, this exclusion saves you up to $3,374 per person annually. Social Security is completely exempt.
South Carolina (see the South Carolina Department of Revenue Retirees Tips and Revenue Ruling #22-11) — South Carolina does not tax Social Security benefits. For other retirement income, including federal annuities and TSP distributions, residents under 65 can deduct up to $3,000. That deduction increases to $10,000 at age 65. The top state income tax rate was 6% in 2025 and is trending downward. Military retirement is fully exempt. Property taxes are exceptionally low, and there is no state estate tax.
Virginia (see Virginia Tax's Subtractions and Virginia Taxes and Your Retirement guidelines) — Virginia taxes income at rates up to 5.75%. If you are 65 or older, you can deduct up to $12,000 of retirement income. However, this deduction phases out if your Adjusted Gross Income (AGI) exceeds $50,000 for single filers or $75,000 for joint filers. You will likely pay state income tax if you have a larger federal annuity and TSP withdrawals.
Maryland — Maryland levies both state and county-level income taxes. The county taxes range from 1.75% to 3.2%. You can exclude up to $36,200 of pension income, but the state reduces this exclusion dollar-for-dollar by any Social Security benefits you receive. If you receive a FERS annuity and Social Security, this rule often wipes out your pension exclusion entirely (see the Comptroller of Maryland Resident Booklet and Maryland iFile).
New Jersey — New Jersey taxes retirement income but offers pension exclusions that phase out entirely once your income crosses specific thresholds (detailed in the NJ Division of Taxation NJ Income Tax — Retirement Income and Publication GIT-1&2).
North Carolina — The state ended its general pension exemption in 1998. If you vested in the federal retirement system before August 12, 1989, your annuity remains exempt under the Bailey Settlement. If you entered federal service after that date, North Carolina taxes your FERS annuity at a flat 4.5% rate.
Colorado — You can subtract up to $20,000 of pension and annuity income if you are between 55 and 64. That exclusion rises to $24,000 at age 65. The state flat tax rate is 4.4%.
Arizona — The state fully exempts federal pensions. Arizona is highly popular for retirees due to this rule and its low cost of living. Your TSP withdrawals are taxed, but the state flat income tax rate has decreased toward 2.5%.

Tier 4: States That Fully Tax Federal Pension Income

These states offer no special tax exemptions for federal retirement income. They treat your FERS annuity as ordinary taxable income:

California (as detailed in the California Franchise Tax Board FTB Pub. 1005) — With a top rate of 13.3%, California taxes most retirees' annuities at effective rates between 6% and 9.3%, depending on total income.
Minnesota — The state taxes public pensions fully. It also remains one of the few states that taxes Social Security benefits for middle- and high-income retirees.
Oregon — Oregon taxes all retirement income. The historical federal pension credit has been severely restricted.
Vermont — The state taxes retirement income fully, offering only narrow exemptions.
Connecticut — Connecticut taxes FERS annuities and TSP withdrawals, though it exempts Social Security for lower-income taxpayers.
Nebraska — Most retirement income is taxable, though the state is phasing out taxes on Social Security.
Montana — Montana taxes public pensions, allowing only a small, phase-out deduction for lower-income taxpayers.
Rhode Island — The state taxes retirement income, though it provides partial relief for low-income retirees over age 65.

The Hidden Wrinkle: TSP Is Not Always Treated Like Your Annuity

Many federal retirees conflate their annuity with their TSP when calculating state taxes. That is a costly mistake.

Your FERS annuity is a defined benefit pension. States that exempt public pensions will cover this monthly payment.

Your TSP is a defined contribution plan. Many states treat TSP withdrawals exactly like private-sector 401(k) or IRA distributions. As a result, the exemption protecting your annuity will not shield your TSP.

Consider these examples:

Alabama — The state exempts your FERS annuity but taxes your TSP distributions as ordinary income.
Hawaii — Your pension is tax-free, but your TSP withdrawals are fully taxable.
New York — The state exempts your annuity but limits your TSP exclusion to $20,000 if you are 59½ or older. Any TSP withdrawals above that limit are fully taxed.

If you plan on withdrawing taxable traditional TSP funds in retirement, check how your prospective state taxes each income source. Do not assume one rule covers both.

The Layer Most People Forget: Local Income Taxes

State tax rates tell only part of the story. Several states allow counties, cities, and school districts to levy their own income taxes on top of the state rate.

If you move to parts of Ohio, Pennsylvania, Maryland, or New York City, you can face local income taxes ranging from 1% to 3.5% or more. Maryland is a prime example. Its county-level income taxes range from 1.75% to 3.2%. A retiree who compares Maryland's state rate to a tax-free state like Florida might calculate a 5.75% difference. In reality, adding local taxes makes the true gap closer to 9%.

Always verify the local tax rates for your specific target zip code, not just the state average.

Real Numbers: What State Taxes Cost a Federal Retiree

To understand how these rules affect your cash flow, look at this hypothetical retiree couple:

FERS Annuity: $48,000/year
TSP Withdrawal: $20,000/year
Social Security: $22,000/year combined
Total Retirement Income: $90,000/year

Scenario A: Florida (No Income Tax)

State income tax: $0
You keep the entire $90,000 for your living expenses.

Scenario B: California (Fully Taxed)

Estimated California state income tax on $90,000: approximately $4,500–$5,500/year (reflecting a ~6% effective rate on retirement income after federal deductions).
Over 20 years, you hand $90,000–$110,000 to the state treasury.

Scenario C: Georgia (Age 65+ with a $65,000 exemption per person)

Excluded income: $130,000 (more than enough to cover the entire $90,000 income).
State income tax: $0 to minimal.
Georgia acts as a zero-tax state for this household.

Scenario D: South Carolina (Age 65+ with a $10,000 deduction per person and exempt Social Security)

Deductions: $20,000 pension deduction (couple) + $22,000 Social Security exemption = $42,000 excluded.
Taxable income: approximately $48,000 ($90,000 − $42,000).
State income tax: approximately $2,400/year (assuming a ~5% effective tax rate).

A difference of $5,500 per year is not a minor detail. Your choice of state dictates how far your pension will stretch.

The Southeast Advantage for Federal Retirees Near Augusta and North Augusta

If you live and work in the greater Augusta or North Augusta area, some of the nation's most retirement-friendly tax laws are in your backyard.

Georgia's $65,000 retirement income exclusion (for those 65 and older) is exceptionally generous. It shows how pension exclusion tax strategies can protect your retirement wealth. South Carolina's full Social Security exemption and falling income tax brackets make it highly competitive. Both states boast low property taxes and impose no estate or inheritance taxes.

If you are willing to move further south, Florida is only a four-hour drive and charges no state income tax at all.

You have excellent tax-saving options in this region. Federal employees here face a much lighter tax burden than those retiring in the mid-Atlantic or on the West Coast.

Frequently Asked Questions

Does my state of residence when I retire determine my taxes, or the state where I worked?

Your state of residence at the time you receive your pension determines your tax obligation. Where you worked as a federal employee does not matter. If you retire from a federal agency in Virginia and move to Florida, you pay zero Virginia income tax on your annuity. You only pay Florida tax, which does not exist.

Does the federal government withhold state taxes from my FERS annuity?

Office of Personnel Management (OPM) will withhold state income tax if you ask them to, provided your state has an income tax. You can set up or update this withholding via OPM's Services Online portal. If you do not set up withholding, you are responsible for paying estimated state taxes yourself.

Does the TSP withhold state taxes on withdrawals?

No. The TSP automatically withholds 20% for federal income taxes on most distributions, but it does not withhold state taxes. You must pay any state tax owed on TSP withdrawals through quarterly estimated payments or by increasing your federal withholding. Many federal retirees get hit with unexpected state tax bills because of this rule.

Do some states only exempt pensions earned before a specific date?

Yes. North Carolina is a well-known example. The Bailey Settlement exempts federal pensions only for employees who were vested in the retirement system before August 12, 1989. If you entered federal service after that date, North Carolina taxes your FERS annuity at a flat 4.5% rate.

Do state estate or inheritance taxes affect federal retirees?

Yes. Twelve states and Washington, D.C., levy their own estate or inheritance taxes, often with exemption thresholds far below the federal limit. If your assets include a home, a TSP balance, Federal Employees' Group Life Insurance (FEGLI) life insurance, and a FERS survivor annuity, your estate could easily trigger these taxes in states like Oregon, Washington, Massachusetts, or Maryland.

Should I change my legal residency to a low-tax state before I retire?

Establishing domicile in a lower-tax state before you begin collecting retirement income can save you thousands of dollars. However, states like California aggressively audit former residents. You must establish genuine ties, including buying or leasing a home, changing your driver's license, registering to vote, and physically living there for the majority of the year. Work with a tax professional before making this transition.

State Tax Laws Change — And So Should Your Plan

State legislatures rewrite retirement tax rules regularly. Georgia recently expanded its retirement exclusion from $35,000 to $65,000. South Carolina continues to trim its top income tax bracket. Under pressure from retirees, several states have eliminated taxes on Social Security over the last decade.

The tax map will look different in five years. You cannot control what state legislatures do, but you can build flexibility into your retirement income plan. Review your tax exposure every few years to ensure your strategy still makes sense.

Your Annuity Is Fixed. Your Tax Exposure Doesn't Have to Be.

Private-sector employees can negotiate raises or find higher-paying work to combat rising costs. Your FERS annuity is a fixed monthly number for life. You cannot earn your way out of a state tax bill once you retire.

That makes your choice of residency one of the most critical decisions you will make. It is also one of the hardest to reverse.

Before you buy a home or sign a lease in a new state, calculate the annual state tax liability. Multiply that number by 20 or 25 years to see the true cost.

We help federal employees in the North Augusta and greater Augusta area analyze their retirement income. We look at how state residency impacts your net take-home pay.

Request your free Pay Stub Review (PSR) today. We will analyze your FERS annuity, map out your TSP strategy, and build a retirement income plan that fits your goals.

Contact us today to schedule your free PSR.

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📍 332 Edgefield Rd, North Augusta, SC 29841

Legal Disclaimer: State income tax laws change frequently. The information in this article reflects general rules as of June 2026 and is provided for educational purposes only. Tax treatment depends on your individual circumstances, filing status, total income, and the specific laws in effect in your state of residence at the time you file. This is not tax or legal advice. Before making any relocation or retirement income decision based on state tax considerations, consult a qualified tax professional and verify current rules with your state's Department of Revenue.