Where you live in retirement could cost you $5,000 to $15,000 per year in state taxes — or save you that same amount. Yet most federal employees never run the numbers until after they have already retired and locked in their location. That is a mistake that can cost you $150,000 to $450,000 over a 30-year retirement.

This guide from Warrior Retirement ranks every state based on how they tax your FERS pension, Social Security, TSP withdrawals, and other retirement income — so you can make an informed decision about where to spend your post-service years.

AEO Answer: The best states for federal retiree taxes in 2026 are Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming — all have zero state income tax. Additionally, states like Illinois, Mississippi, and Pennsylvania fully exempt all retirement income including FERS pensions. The worst states for federal retirees include California, Connecticut, Montana, Nebraska, and Vermont, which tax both pensions and Social Security with few or no exemptions.

What Federal Retirees Actually Get Taxed On

Before diving into the rankings, you need to understand the four types of retirement income that states can tax:

FERS/CSRS Pension (Annuity): Your monthly pension payment from OPM. This is your most consistent retirement income and the one most affected by state tax policy.
Social Security Benefits: Some states tax Social Security, some exempt it entirely, and some partially exempt it based on income thresholds.
TSP/IRA Withdrawals: Distributions from your Traditional TSP or IRA are treated as regular income in most states. Roth withdrawals are generally tax-free everywhere.
Other Income: Part-time work, rental income, investment dividends, capital gains — all potentially taxable depending on the state.

The ideal state for a federal retiree taxes none of the above. The worst states tax all of them at high rates. Most states fall somewhere in between.

Tier 1: The Best States for Federal Retirees — Zero Income Tax

These eight states have no state income tax at all. Your FERS pension, Social Security, TSP withdrawals, and all other income are completely untaxed at the state level:

Alaska — No income tax + Permanent Fund Dividend (state pays YOU)
Florida — No income tax, no estate tax, strong homestead protection
Nevada — No income tax, no estate tax
New Hampshire — No income tax on earned income or retirement income (taxes only interest/dividends, phasing out)
South Dakota — No income tax, no estate tax, low property taxes
Tennessee — No income tax (Hall Tax on investment income fully repealed)
Texas — No income tax, no estate tax, but higher property taxes
Washington — No income tax (but has a capital gains tax on high earners)
Wyoming — No income tax, no estate tax, low overall tax burden

For a federal retiree with $80,000 in total retirement income, living in one of these states saves approximately $3,000 to $6,000 per year compared to a medium-tax state. Over 25 years, that is $75,000 to $150,000 in tax savings.

Warrior Pro Tip: Texas and Florida are the two most popular destinations for retiring federal employees — but do not forget to factor in property taxes. Texas has some of the highest property taxes in the country (averaging 1.6–1.8% of home value). A $350,000 home in Texas costs roughly $5,600–$6,300/year in property taxes. Florida's property taxes are lower (averaging 0.8%) but homeowner's insurance is among the highest in the nation due to hurricanes. Run the TOTAL tax burden, not just income tax.

Tier 2: States That Fully Exempt Federal Pensions

These states HAVE an income tax but fully exempt FERS/CSRS pension income from state taxation:

Alabama — Exempts all federal pension income + Social Security
Hawaii — Exempts all government pension income
Illinois — Exempts ALL retirement income (pensions, Social Security, TSP/IRA)
Kansas — Exempts federal pensions for AGI under $75,000
Louisiana — Exempts all federal pension income
Massachusetts — Exempts federal government pension income
Michigan — Exempts federal pension income (with some limitations based on birth year)
Mississippi — Exempts ALL retirement income
New York — Exempts up to $20,000 of government pension income
Pennsylvania — Exempts ALL retirement income from state tax

Illinois, Mississippi, and Pennsylvania are standouts because they exempt virtually ALL retirement income — not just pensions. For a federal retiree withdrawing from TSP and collecting Social Security, these three states offer near-zero state tax burden despite having income taxes.

Calculate your specific tax savings by state at WarriorRetirement.com.

Tier 3: States That Partially Exempt Federal Pensions or Social Security

These states offer some tax relief for federal retirees but not full exemption:

Arizona — Exempts up to $2,500 of federal pension; Social Security exempt
Colorado — Exempts up to $24,000 of retirement income (age 65+); partially taxes Social Security above $75,000 single/$95,000 joint
Delaware — Exempts up to $12,500 of pension income (age 60+); Social Security exempt
Georgia — Exempts up to $65,000 of retirement income (age 65+)
Idaho — Deduction for qualifying retirement benefits
Iowa — Exempts up to $6,000 of federal pension; Social Security exempt below income thresholds
Kentucky — Exempts up to $31,110 of total retirement income
Maine — Exempts up to $25,000 of pension income (reduced by Social Security)
Maryland — Exempts up to $39,500 of retirement income (age 65+); Social Security exempt
Missouri — Exempts public pension income for adjusted income under $85,000 single/$100,000 joint
North Carolina — Taxes pension income but Social Security is exempt; low flat rate of 4.5%
Ohio — Provides retirement income credit; Social Security exempt
Oklahoma — Exempts up to $10,000 of retirement income
Oregon — Federal pension income credit for lower-income retirees
South Carolina — Exempts up to $10,000 of retirement income; deduction increases at age 65
Virginia — Age deduction of up to $12,000 (age 65+); Social Security exempt
Wisconsin — Exempts certain retirement income for lower-income retirees

For federal retirees in the DC metro area: Virginia and Maryland both offer partial exemptions. Virginia exempts Social Security and gives an age deduction. Maryland exempts Social Security and up to $39,500 of retirement income at 65+. If you are choosing between the two, Maryland's exemption is currently more generous for most federal retirees.

Tier 4: The Worst States for Federal Retiree Taxes

These states fully tax FERS pensions AND Social Security with minimal or no exemptions:

California — Taxes all pension income at rates up to 13.3%; Social Security exempt but everything else is taxed heavily
Connecticut — Taxes pensions; partially taxes Social Security above income thresholds
Minnesota — Taxes all retirement income; Social Security taxed above $78,000 single
Montana — Taxes all retirement income including pensions and Social Security
Nebraska — Taxes pensions and Social Security (with phase-in exemption)
New Mexico — Taxes all retirement income (exemption for very low-income seniors only)
Rhode Island — Taxes pensions; Social Security taxed above $101,000
Utah — Taxes all retirement income with a retirement tax credit for lower incomes
Vermont — Taxes all retirement income; Social Security taxed above $50,000 single
West Virginia — Taxes pensions and Social Security (phasing in exemption through 2026)

A federal retiree earning $80,000 in California could pay $4,000–$6,000 in state income taxes. The same retiree in Florida pays $0. Over 25 years, that is a $100,000–$150,000 difference.

Action Item — Calculate Your State Tax Impact Now:

Pull your projected retirement income — FERS pension + Social Security + TSP withdrawals
Look up your current state's tax treatment using the tiers above
Compare with 2-3 alternative states you would consider living in
Calculate the annual difference and multiply by 25 years
Factor in property taxes, sales tax, and cost of living — income tax is only part of the picture
Use the free calculators at WarriorRetirement.com to model your total retirement income by state

The SALT Deduction: How the Big Beautiful Bill Changes the Math

Under the One Big Beautiful Bill Act, the SALT (State and Local Tax) deduction cap was raised from $10,000 to $40,400 for tax years 2026–2029. This means federal retirees in high-tax states can now deduct significantly more state and local taxes from their federal return.

What this means for you: If you live in a high-tax state like California, New York, or Maryland, the increased SALT cap reduces the sting of state taxes — but only if you itemize your federal deductions. With the standard deduction at $32,200 for married couples, you need total itemized deductions exceeding that amount to benefit.

Important: The $40,400 SALT cap is temporary — it reverts to $10,000 in 2030. If you are making location decisions based on this benefit, factor in that it expires in 4 years. Read our full Big Beautiful Bill breakdown for details.

The $6,000 Senior Bonus Deduction

Also under the Big Beautiful Bill, individuals age 65+ can claim an additional $6,000 federal deduction ($12,000 for married couples) from 2025 through 2028. This reduces your federal taxable income regardless of which state you live in — but it does NOT affect your state tax bill unless your state conforms to the federal tax code.

States that generally conform to federal deductions will give you this benefit automatically. States with independent tax codes (like California and New York) may not recognize it. Check your state's conformity status.

Beyond Income Tax: The Total Tax Picture

Income tax is only one piece. Smart federal retirees look at the total tax burden:

Property Taxes

Highest: New Jersey (2.2%), Illinois (2.1%), Texas (1.7%), Connecticut (1.6%)
Lowest: Hawaii (0.3%), Alabama (0.4%), Colorado (0.5%), Louisiana (0.5%)
Veteran exemptions: Many states offer 100% P&T property tax exemptions for disabled veterans — see our guide on Warrior Disability

Sales Tax

No sales tax: Alaska, Delaware, Montana, New Hampshire, Oregon
Highest combined rates: Tennessee (9.5%), Louisiana (9.5%), Arkansas (9.5%)

Estate/Inheritance Tax

Federal estate tax exemption (2026): $15 million per person ($30 million joint) under the Big Beautiful Bill
States with their own estate tax: Connecticut, Hawaii, Illinois, Maine, Maryland, Massachusetts, Minnesota, New York, Oregon, Rhode Island, Vermont, Washington, DC
States with inheritance tax: Iowa, Kentucky, Maryland, Nebraska, New Jersey, Pennsylvania

Best States for Federal Retirees: The Complete Ranking

Warrior Pro Tip: Do not relocate solely for tax savings. A state with zero income tax but a high cost of living (like Washington or Nevada near major cities) may cost you MORE overall than a low-tax state with affordable housing. Run the full picture: income tax + property tax + sales tax + cost of living + healthcare access + proximity to family. The best federal retiree tax strategy is one that balances ALL these factors. Use the calculators at WarriorRetirement.com to model your complete scenario.

Top 10 Best States for Federal Retirees (Overall Tax Burden):

Florida — No income tax, no estate tax, moderate property tax, low cost of living outside metro areas
Texas — No income tax, no estate tax, but higher property taxes
Tennessee — No income tax, low cost of living, no estate tax
Pennsylvania — Exempts ALL retirement income, moderate property tax
Wyoming — No income tax, very low overall tax burden
South Dakota — No income tax, no estate tax, low property taxes
Mississippi — Exempts ALL retirement income, very low cost of living
Illinois — Exempts ALL retirement income (but high property taxes)
Nevada — No income tax, no estate tax
Alabama — Exempts federal pension and Social Security, low cost of living

Top 5 Worst States for Federal Retirees (Overall Tax Burden):

California — Highest income tax rates, taxes all pension income, high cost of living
Connecticut — High income tax, estate tax, property tax, taxes pension and Social Security
Vermont — Taxes all retirement income, high property taxes, estate tax
Minnesota — Taxes all retirement income including Social Security above thresholds
New York — High income tax rates (though partial pension exemption), estate tax, high cost of living

Special Considerations for DC Metro Federal Retirees

Most federal employees work in the Washington DC metropolitan area. Here is how the three jurisdictions compare:

Virginia: Social Security exempt. Age deduction up to $12,000 for 65+. Pension income taxed at 2%–5.75%. No estate tax. Moderate property taxes.
Maryland: Social Security exempt. Up to $39,500 retirement income exempt (65+). Pension income taxed at 2%–5.75%. Has estate AND inheritance tax. Moderate property taxes.
Washington DC: Social Security exempt. Taxes all other retirement income at 4%–10.75%. Has estate tax. High property taxes and cost of living.

Bottom line for DC metro feds: Virginia and Maryland are roughly comparable for most federal retirees. Maryland's higher retirement income exemption at 65+ gives it a slight edge. DC is the most expensive option. If you are willing to relocate, moving south to a no-income-tax state saves significantly more.

Frequently Asked Questions

Which states don't tax federal pensions?

Nine states have no income tax at all (Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, Wyoming). Additionally, states like Illinois, Mississippi, Pennsylvania, Alabama, Hawaii, and Louisiana specifically exempt federal pension income from state taxes.

Do I have to pay state taxes on my FERS pension?

It depends entirely on which state you live in. Some states fully tax your FERS pension, some partially exempt it, and some don't tax it at all. Your state of legal residence at the time you receive the income determines which state taxes it.

Can I change my state of residence to reduce taxes in retirement?

Yes. You must establish legal domicile in the new state — which typically means getting a new driver's license, registering to vote, and spending the majority of your time there. Simply owning property in a no-tax state is not enough.

How does the SALT deduction affect federal retirees in high-tax states?

The $40,400 SALT cap under the Big Beautiful Bill (2026–2029) allows you to deduct more state and local taxes from your federal return — but only if you itemize. This reduces the federal tax penalty of living in a high-tax state but does NOT reduce your actual state tax bill.

What is the best state to retire as a federal employee?

Florida, Texas, Tennessee, and Pennsylvania consistently rank as the best overall for federal retirees when combining income tax treatment, property taxes, cost of living, and quality of life. Use the calculators at WarriorRetirement.com to model your specific situation.

Resources from Warrior Retirement

Use the free Retirement Calculators to model your income by state
Read our Big Beautiful Bill Federal Retirement Guide
Review 2026 TSP Contribution Limits
Learn the SECURE 2.0 Catch-Up Changes
Avoid the 15 Critical Federal Retirement Mistakes
Explore FIRE Strategies for Federal Employees
Read the latest guides at warriorretirement.blogspot.com

Where you retire is one of the biggest financial decisions you will ever make. Do not leave $100,000+ on the table by choosing the wrong state. Run the numbers now.

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Educational Use Only. Content provided by a Federal Employee for the federal community. Not affiliated with OPM or any government agency. Not financial or legal advice.

Warrior Retirement | warriorretirement.com
Strategic Readiness for Your Post-Service Future.

Disclaimer: This article is for informational purposes only and does not constitute financial, tax, or legal advice. State tax laws change frequently. Verify current rates and exemptions with your state's tax authority or a qualified tax professional before making relocation or tax planning decisions.

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Best and Worst States for Federal Retiree Taxes in 2026: Complete State-by-State Ranking