Does Maine Tax Pensions and Other Retirement Income?

For those considering retiring in Maine, understanding its approach to taxing retirement income is an important step. The state’s rules are not a simple yes or no; they involve a general policy of taxation combined with a specific deduction that many retirees can use. This deduction can significantly lower a retiree’s state income tax bill, making it a key part of financial planning.

Maine’s General Rule on Pension Taxation

As a baseline, Maine’s income tax structure includes most forms of retirement income in its definition of taxable income. This means that funds from employer-sponsored plans like 401(k)s, traditional IRAs, and both private and public pensions are subject to the state’s graduated income tax rates. When a retiree takes a distribution, that amount is added to their other income for the year to calculate their total Maine Adjusted Gross Income (AGI), which is then used to determine their overall tax liability.

The Maine Pension Income Deduction

To offset the taxation of retirement income, Maine offers a pension income deduction. For the 2025 tax year, an eligible individual can deduct up to $35,000 of qualifying retirement income, an amount indexed for inflation. The deduction is available to each eligible taxpayer, so a married couple filing jointly could deduct more than $70,000 if both spouses have qualifying income.

Eligible income sources for the deduction include:

• Payments from private pensions
• Government employee pensions
• Distributions from 401(k) and 403(b) plans
• Withdrawals from traditional IRAs

Rollovers from one retirement account to another are not eligible, as they are not considered distributions. Similarly, distributions from Roth IRAs are not included because they are already exempt from both federal and state income tax.

The total allowable deduction is reduced dollar-for-dollar by any Social Security or Railroad Retirement benefits the taxpayer receives. For instance, if a retiree receives $20,000 in Social Security benefits, their maximum pension deduction for other retirement income is reduced to $15,000 ($35,000 – $20,000).

Eligibility Requirements for the Deduction

To claim the Maine pension income deduction, the income must be from an eligible retirement account and received by the person who earned it or by their surviving spouse. For example, income received by a former spouse under a qualified domestic relations order does not qualify. The taxpayer must also be a Maine resident to claim the deduction, which is not subject to an income limit.

A taxpayer’s Maine AGI can, however, impact other deductions. For the 2025 tax year, the state’s standard and itemized deductions begin to phase out for higher-income individuals. The phase-outs start when AGI exceeds $103,550 for single filers and $207,100 for those married filing jointly. A high-income retiree can still claim their full pension deduction, but their separate standard or itemized deduction may be reduced.

For example, a single retiree with a $110,000 AGI that includes $20,000 in Social Security benefits would calculate their pension deduction as $15,000 ($35,000 – $20,000). They can claim this full amount. However, because their AGI exceeds the $103,550 threshold, their separate Maine standard deduction will be reduced.

Treatment of Specific Retirement Plans

Military retirement pay, including survivor benefits, is fully exempt from Maine income tax. These military benefits do not reduce the amount of the pension deduction an individual can claim on other qualifying retirement income.

Railroad Retirement benefits are treated in two tiers. Tier 1 benefits are not taxed by Maine but do reduce the available pension income deduction, similar to Social Security. Tier 2 benefits are treated as private pension income and are eligible for the Maine pension income deduction.

Retirees who move to Maine can also benefit from the deduction. As long as the individual is a Maine resident when they file their tax return, pension income earned from employment in other states is eligible for the Maine pension income deduction. This policy applies the same rules to all resident retirees, regardless of where their pension originated.

How to Claim the Deduction on Your Tax Return

Claiming the pension deduction begins with the “Worksheet for Pension Income Deduction,” which is part of Maine Schedule 1S, Income Subtraction Modifications. On this worksheet, the taxpayer enters their eligible pension income and any Social Security or Railroad Retirement benefits received. The form guides the calculation to determine the final deductible amount.

The result from the worksheet is entered on Schedule 1S, which is used to report all income subtractions. The total from Schedule 1S is then transferred to the main Form 1040ME. This reduces the taxpayer’s Maine adjusted gross income and lowers their overall state tax liability.