Are Pensions Taxable in Massachusetts?

Understanding how pension income is taxed in Massachusetts is important for retirees and those planning for retirement. Massachusetts has specific rules regarding the taxability of various pension types, which can significantly impact financial planning. This article clarifies these tax rules to help residents and non-residents navigate their pension income obligations.

General Taxability of Pension Income

In Massachusetts, pension income is generally considered gross income and is subject to the state’s personal income tax. For the 2024 tax year, Massachusetts applies a flat income tax rate of 5% on most earned and unearned income, including pension income. This means that, unless a specific exemption applies, pension distributions will be included in your taxable income.

This rule applies to pensions received from both private employers and public entities. Whether a pension plan is classified as qualified or non-qualified under federal tax law, its distributions are subject to Massachusetts income tax. Qualified plans, such as 401(k)s or traditional IRAs, tax distributions in retirement, as contributions were often tax-deductible. Non-qualified plans may have different rules regarding the timing of taxation, but the income remains subject to the state’s tax rate.

Exemptions and Exclusions

Massachusetts law provides several exemptions and exclusions for certain pension income, reducing or eliminating the state tax burden for eligible retirees. These exemptions are important for many individuals receiving retirement benefits.

Pensions received from the Commonwealth of Massachusetts or its political subdivisions are generally exempt from state income tax. This includes pension income for state, county, and municipal employees, as well as teachers who contributed to their public retirement systems. Similarly, pensions received from the U.S. government, such as those from the Civil Service Retirement System or Federal Employees Retirement System, are also exempt from Massachusetts income tax.

Retired pay received by members of the uniformed services of the United States is specifically exempt from Massachusetts taxation. This applies to military pensions, including those from the Army, Navy, Marine Corps, Air Force, Coast Guard, and commissioned corps of the Public Health Service and National Oceanic and Atmospheric Administration. This exemption applies regardless of whether the military pension was contributory or non-contributory.

For contributory pension plans, where the employee contributed to the pension with after-tax dollars, the portion of the pension attributable to these previously taxed contributions is not subject to Massachusetts income tax. This is often referred to as the “cost recovery rule” or “annuity exclusion.”

Pensions received from other states or their political subdivisions may also be exempt for Massachusetts residents under certain conditions. If the other state provides a reciprocal exemption for Massachusetts public employee pensions or does not impose an income tax, then the pension income from that state may be deductible from Massachusetts gross income. This aims to prevent double taxation on public pensions for residents who earned benefits in other states.

Social Security benefits are fully exempt from Massachusetts income tax. This exemption is often a point of confusion for retirees, as Social Security benefits are sometimes considered alongside other pension income.

Reporting Pension Income

Reporting pension income on your Massachusetts tax return is important, whether the income is taxable or exempt. Taxpayers typically receive Form 1099-R, “Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc.,” from their pension administrator. This form provides key details for tax reporting, including the gross distribution in Box 1 and the taxable amount in Box 2a. Box 5 on Form 1099-R may indicate employee contributions, relevant for determining the non-taxable portion of contributory plans.

For Massachusetts residents, pension income is primarily reported on Form 1, the Massachusetts Resident Income Tax Return. Taxable pension income is generally reflected on Schedule X, “Other Income,” which is then carried over to Form 1. If a pension is fully exempt, such as a Massachusetts state or U.S. government pension, the amount may still be reported on Form 1099-R but will be excluded from the taxable income calculation on the Massachusetts return.

For contributory pensions, taxpayers may need to calculate the taxable amount. The instructions for Schedule X often provide guidance or worksheets to determine the amount to be included as taxable income.

Non-Resident Pension Taxation

Massachusetts has specific rules for non-residents receiving pension income. Under federal law, 4 U.S.C. § 114, states are prohibited from taxing distributions from qualified retirement plans received by non-residents. This federal preemption covers common qualified plans such as 401(k)s, IRAs, 403(b)s, and qualified pension plans.

If a non-resident receives distributions from a qualified pension plan, Massachusetts cannot impose income tax on that income, regardless of where it was earned or where the employer was located. The intent of this federal law is to prevent multiple states from taxing the same retirement income simply because an individual worked in those states during their career.

However, limited exceptions to this federal protection exist. Massachusetts may tax certain non-qualified deferred compensation plans or other pension-like income if it is considered Massachusetts-source income. This typically applies if the income is derived from or effectively connected with a trade or business or employment performed within Massachusetts. For instance, some non-qualified deferred compensation might be taxable if it represents income earned for services performed in Massachusetts by a non-resident.

Non-residents are only required to file a Massachusetts tax return if they have Massachusetts-source income exceeding certain thresholds. If a non-resident’s only income from Massachusetts is from a qualified pension plan, they generally would not need to file a Massachusetts return. The federal law ensures that most retirement income for non-residents is taxed only by their state of residence.