Do You Pay Federal Taxes on Pensions in Florida?
Living in Florida doesn't exempt your pension from federal income tax. Learn how your retirement income is taxed by the IRS, regardless of state law.
Yes, residents of Florida are required to pay federal income tax on their pension income. While Florida is known for its favorable tax environment for retirees, this advantage applies only at the state level. The Internal Revenue Service (IRS) operates under federal law, which uniformly taxes income, including pensions, across all states.
Federal Taxation of Pension Income
The IRS considers distributions from pension plans as taxable income. This income is taxed at your ordinary federal income tax rates, which means it is treated the same as wages or salary. The specific rate you pay depends on your total annual income, which determines your federal income tax bracket for the year.
There is an exception if you made after-tax contributions to your pension plan. In this scenario, a portion of the distribution may be considered a tax-free return of your own money. The non-taxable part is calculated based on the total amount you contributed relative to the total expected payout from the plan. This ensures you are not taxed on the return of your previously taxed contributions.
The Role of Florida’s State Tax Laws
Florida is one of the few states that does not levy a personal income tax. This means that as a resident, you will not owe any state tax on your pension distributions, Social Security benefits, or income from retirement accounts like 401(k)s and IRAs. The absence of a state income tax is a primary reason the state is popular among retirees.
Federal and state tax systems are separate and independent. Florida’s decision not to tax personal income has no bearing on your federal tax liability. The IRS enforces federal tax law nationwide, and all U.S. citizens and residents who meet minimum income filing requirements must pay federal income tax.
Reporting Pension Income to the IRS
Each year, you will receive a Form 1099-R from your pension plan administrator. This document is essential for accurately reporting your income. It details the total amount of your pension distribution for the year and how much of it is considered taxable.
On Form 1099-R, Box 1 shows the gross distribution, which is the total amount of money you received from the plan during the year. Box 2a reports the taxable amount of the distribution. For many retirees, the amounts in Box 1 and Box 2a will be the same, indicating the entire pension is subject to federal income tax.