Does Wisconsin Tax Pensions From Other States?

Wisconsin residents receiving pension income from another state may wonder whether they owe state taxes on it. Wisconsin has specific rules governing how pensions are taxed, and understanding them can help retirees manage their tax burden effectively.

How Residency Status Affects Taxation

Wisconsin taxes all income earned by full-year residents, regardless of its source. This means pension income is subject to state tax if the recipient lives in Wisconsin for the entire year.

For individuals who move in or out of Wisconsin, only the portion of income earned while a resident is taxable. If a retiree relocates to Wisconsin, pension payments received after establishing residency are taxed. Conversely, if a Wisconsin resident moves to a state without an income tax, their pension income is no longer subject to Wisconsin taxation.

Nonresidents do not owe Wisconsin tax on pension income, even if the pension comes from a Wisconsin-based employer. Federal law prohibits states from taxing the retirement income of nonresidents. Therefore, someone who worked in Wisconsin but retires elsewhere will not have their pension taxed by Wisconsin unless they later establish residency in the state.

Rules for Pension Income From Other States

Wisconsin taxes pensions received by its residents, regardless of where the pension was earned or paid from. This applies to private employer pensions, government retirement plans, and military pensions, unless a specific exemption applies.

Certain government pensions are exempt. Wisconsin does not tax retirement benefits from the U.S. military, the Railroad Retirement Board, or Wisconsin state and local government retirement systems. However, this exemption does not apply to public pensions from other states, which remain taxable in Wisconsin. Some states offer reciprocal exemptions for government pensions, but Wisconsin does not.

Pension rollovers also impact taxation. If a retiree rolls over a pension distribution into another qualified retirement account, such as an IRA, the transfer is not considered taxable income. However, if the pension distribution is taken as a lump sum and not reinvested in a tax-deferred account, Wisconsin taxes it as income in the year it is received. This is particularly relevant for individuals who retire in another state and later move to Wisconsin, as the timing of withdrawals can affect tax liability.

What to Know About Reciprocity Agreements

Reciprocity agreements allow residents to pay income tax only in their home state if they earn wages in another state. Wisconsin has such agreements with Illinois, Indiana, Kentucky, and Michigan, meaning residents working in these states only pay Wisconsin income tax on their wages. However, these agreements apply only to wages and salaries—not to pensions, 401(k) distributions, or IRA withdrawals.

Because pension income does not qualify for reciprocity, retirees receiving benefits from an out-of-state employer or government plan must follow Wisconsin’s standard tax rules. Some retirees mistakenly assume that because their former employer was based in a reciprocity state, their pension income is exempt from Wisconsin taxation, but this is not the case. Pensions are classified as deferred compensation and do not fall under reciprocity agreements.

In some cases, retirees may have pension income withheld for taxes by another state. This can happen if the pension administrator is based in a state without an agreement or if the retiree previously lived in a state that taxes pensions at the source. Since Wisconsin does not recognize reciprocity for pensions, individuals in this situation may need to request a refund from the other state while ensuring they properly report the income on their Wisconsin tax return. Some states automatically withhold taxes on pension distributions unless the retiree submits a waiver form, so it’s important to verify withholding policies with the pension provider.

Filing Requirements for Wisconsin Returns

Wisconsin residents receiving pension income must determine whether they meet the state’s income threshold for filing a tax return. For 2023, single filers under 65 must file if their gross income exceeds $12,760, while those 65 and older have a higher threshold of $13,760. Married couples filing jointly face limits of $23,520 if both are under 65, increasing to $25,520 if both are at least 65. These thresholds include all taxable pension income, along with other sources such as wages, dividends, and rental earnings.

Taxpayers must file if they had any Wisconsin income tax withheld, even if their total taxable income falls below the filing requirement. This often applies to retirees whose pension administrators withhold Wisconsin tax from distributions. Filing ensures a refund if too much was withheld. Additionally, those who anticipate owing state taxes but did not have sufficient withholding may be required to make estimated tax payments to avoid penalties under Wisconsin law.

Credits for Out-of-State Taxes Paid

Retirees who have taxes withheld by another state on their pension income may be eligible for a credit to prevent double taxation. Wisconsin offers a credit for taxes paid to another state, allowing residents to offset their Wisconsin tax liability.

The credit is only available if the other state directly taxes the pension income and does not provide a refund mechanism for nonresidents. Since many states do not tax nonresident pension income due to federal law, retirees should verify whether they are actually required to pay taxes to the other state before claiming the credit. If eligible, the credit is calculated by comparing the tax paid to the other state with the Wisconsin tax owed on the same income. The allowable credit is the lesser of the two amounts. Taxpayers must file Schedule OS with their Wisconsin return and provide documentation, such as a copy of the other state’s tax return or withholding statement, to substantiate the claim.