State-by-State Guide: How Pension and DROP income is Taxed

State-by-State Guide: How Pension & DROP Income Is Taxed

A reference guide for firefighters and public safety retirees. Verify exact figures with your state's Department of Revenue before filing, as thresholds and rules change frequently.

Tier 1: No State Income Tax At All

These 9 states don't tax any income — including pensions, DROP payouts, 401(k)/457(b) distributions, and Social Security.

State	Notes
Alaska	No income tax. High property tax in some areas.
Florida	No income tax. No estate/inheritance tax either.
Nevada	No income tax. Higher sales tax (~8.24% combined avg).
New Hampshire	No wage tax. Interest/dividends tax phased out completely by Jan 1, 2027.
South Dakota	No income tax. Low overall tax burden.
Tennessee	No income tax. High sales tax (~9.5%+ combined).
Texas	No income tax. High property taxes offset savings.
Washington	No wage tax. 7% capital gains tax applies above ~$262K-270K (doesn't affect pension/DROP/retirement account distributions).
Wyoming	No income tax. Low overall tax burden.

Tier 2: Full Pension Exemption (Despite Having an Income Tax)

These states tax regular wages but fully exempt pension income — including, in most cases, DROP distributions and public safety pensions.

State	Pension Treatment	Watch For
Alabama	Defined-benefit pensions (incl. government) fully exempt	401(k)/IRA distributions still taxable
Hawaii	Public/private pensions exempt	Only the portion you personally contributed is taxable; 401(k)/IRA still taxed
Illinois	All retirement income exempt (pension, 401k/IRA, Social Security)	High property tax (among highest in U.S.)
Iowa	All retirement income exempt (age 55+)	—
Mississippi	Pension exempt if taken after age 59½	Early DROP/pension withdrawals before 59½ may not qualify
Pennsylvania	All retirement income exempt after age 59½	Same age-gating issue as Mississippi
Michigan	Fully phased in for 2026: retirement income exempt up to ~$67,610 (single) / ~$135,220 (joint)	Income cap applies

Government-Pension-Specific Exemptions (private pensions treated differently)

State	Public/Government Pension	Private Pension
New York	Fully exempt	Only $20,000 exclusion
Massachusetts	Fully exempt	Fully taxed
Louisiana	Fully exempt	Partially taxed
Wisconsin	Exempt (65+)	Fully taxed

Tier 3: Partial Exclusion (Often Age-Restricted)

These states tax pension/DROP income as ordinary income by default, but offer a deduction or exclusion — usually starting at a specific age. This is the tier that matters most for early-retiring firefighters, since many of these thresholds don't kick in until 59½–65, well after a firefighter might retire via DROP in their 40s or early 50s.

State	Exclusion Details
Georgia	Up to ~$130,000 retirement income exclusion (age 62+/65+)
New Jersey	Up to ~$100,000 exclusion (age-qualified)
South Carolina	~$15,000+ retirement income exclusion
Colorado	Pension income cap removed for 2026 — more generous than prior years
Delaware	Up to $12,500 exclusion (age 60+)
Kentucky	Retirement income exclusion available
Virginia	Limited age-based retirement deduction
Oklahoma	Limited pension income exclusion
Idaho	Limited pension deduction
Indiana	Some pension exclusions available
Maryland	Pension exclusion, age-based
Maine	Retirement income deduction
Ohio	Modest retirement income credits
North Dakota	Retirement income deduction; low top rate (2.5%) regardless

States That Still Tax Social Security (Separate Issue)

Only 8 states still tax Social Security benefits in some form, most with income-based exemptions:

Colorado, Connecticut, Minnesota, Montana, New Mexico, Rhode Island, Utah, Vermont

(West Virginia fully eliminated its Social Security tax as of the 2026 tax year, completing a 3-year phaseout.)

Key Takeaways for Firefighter Readers

1. "No income tax" ≠ "no taxes overall." States like Texas and New Hampshire make up for it with high property taxes; Tennessee and Washington lean on sales tax.

2. Government pensions often get better treatment than private pensions in the same state — New York is the clearest example: a firefighter's pension is fully exempt, while a private-sector pension only gets a $20,000 exclusion.

3. Age-gating is the hidden trap for early retirees. A firefighter who retires at 45–50 via DROP may not qualify for many Tier 3 exclusions until they turn 59½–65. Someone could go a decade or more paying full tax on pension/DROP income before the exclusion applies.

4. 401(k)/457(b) treatment often differs from pension treatment, even within the same state (Hawaii being the clearest example). Don't assume "my state doesn't tax pensions" means deferred comp is safe too.

5. Rules change often. Michigan just finished a 3-year phase-in (2026). Colorado just removed its pension cap (2026). West Virginia just finished phasing out Social Security tax (2026). Always verify current-year rules before making a relocation or retirement-timing decision.

Disclaimer: This guide is for general informational purposes and reflects rules understood to be current as of mid-2026. Tax law changes frequently and varies by individual circumstances. Consult a CPA or tax professional familiar with your specific state and pension system before making financial decisions.