Maine for retirees: Social Security untaxed, the $49,824 pension deduction, and the Roth conversion trap

A Maine retiree pays no state tax on Social Security, none on military retirement pay, and none on the first $49,824 per person of pension, IRA, 401(k), 403(b) and 457(b) income for 2026, less the Social Security that person received. For a typical couple on Social Security and modest retirement accounts, that leaves little or nothing for Maine to tax, and the refundable property tax fairness credit, up to $2,000 at age 65 or older (2025 figure), can turn the return into a check. The design has edges, though. The pension deduction is reduced dollar for dollar by Social Security, so a retiree with $30,000 of benefits has only $19,824 of room left. It phases out above $125,000 of federal AGI single or $250,000 joint (2025 thresholds). Distributions before age 55 do not qualify. And a Roth conversion is not “pension income” to Maine: the converted amount is taxed in full at 5.8% to 7.15%.

Social Security: subtracted in full

Whatever portion of Social Security and Railroad Retirement benefits the federal return taxes, line 6b of the 1040, comes off on Schedule 1S, line 3. There is no age test and no income limit. If the federal formula taxes $30,600 of a couple’s $36,000 in benefits, $30,600 is in federal AGI and $30,600 is subtracted; the Maine tax on it is zero.

Social Security does one other thing on the Maine return, and it is the thing retirees miss. The gross benefit received, taxable or not, reduces the pension income deduction cap. Worksheet line P3 asks for “total social security and railroad retirement benefits you received, whether taxable or not,” and line P4 subtracts it from the $49,824 maximum. A person with $49,824 or more of Social Security has no pension deduction at all, and their pension or IRA withdrawals are fully taxed.

The pension income deduction

Schedule 1S, line 4, with its worksheet, is the heart of the Maine retiree return. The 2026 maximum is $49,824 per person, up from $48,216 in 2025; the Department sets it each year at the annual Social Security benefit for a worker retiring at full retirement age, so it rises with benefits. The worksheet is done separately for each spouse, so a couple can deduct up to $99,648 between them, but one spouse’s unused room cannot be given to the other.

Eligible income is from employer plans under IRC 401(a), 401(k), 403 and 457(b), and from IRAs under 408, Roth IRAs under 408A, SEPs and SIMPLEs. MainePERS and other government pensions qualify under the same cap. A surviving spouse claims survivor benefits under the same rules.

What does not qualify. The 2025 instructions list the exclusions. Distributions received before age 55 do not count unless they are part of a series of substantially equal periodic payments; this took effect September 24, 2025 and applies to the 2025 return onward. Lump sums on which ten-year averaging was elected on federal Form 4972 are out. Disability paid as wages is out. Nonqualified deferred compensation under 457(f) is out. And in the instructions’ own words, “a conversion of benefits from one account to another does not qualify for the pension income deduction,” with the example that “a deduction may not be taken when a taxpayer converts a traditional IRA to a Roth IRA.”

The phase-out. Since 2025 the deduction is reduced when federal AGI, line 14 of Form 1040ME, exceeds $125,000 single or married filing separately, $187,500 head of household, or $250,000 joint and surviving spouse (2025 thresholds; indexed, 2026 figures to come). The reduction is proportional: the excess over the threshold is divided by $100,000 ($50,000 married filing separately) (verify), and that fraction of the deduction is lost, so the whole deduction is gone at $225,000 single or $350,000 joint of federal AGI. Because the test is federal AGI, a large IRA withdrawal or a Roth conversion in the same year can shrink the deduction on the ordinary pension income that would otherwise have qualified.

Military retirement: exempt without limit

Retirement pay for service in the Army, Navy, Air Force, Marines, Coast Guard or Space Force is fully exempt, entered on worksheet line P9 with no cap, no Social Security reduction and no phase-out. Survivor annuities paid to the spouse of a deceased member are subtracted separately on Schedule 1S, line 6. Non-Maine active-duty pay received by a Maine resident is subtracted on line 5. Civil service and other federal civilian pensions are not military pay; they fall under the $49,824 cap with everyone else.

Roth conversions: fully taxed here

A Roth conversion is a distribution from a traditional IRA deposited in a Roth. It is taxable federally in the year of conversion and sits in federal AGI, which is where Maine starts. Maine does not treat it as eligible pension income, so nothing comes off on Schedule 1S. The whole conversion is Maine taxable income at 5.8%, 6.75% or 7.15%, and a conversion large enough to lift a single filer over $1,000,000 of taxable income pays the 2% surcharge on the excess as well.

That makes the arithmetic different from the arithmetic for an ordinary IRA withdrawal. A couple with $20,000 of Social Security apiece has $29,824 of pension deduction room each; a $50,000 withdrawal from one spouse’s IRA, spent or moved to a brokerage account, is $29,824 deductible and $20,176 taxed. The same $50,000 converted to a Roth is $50,000 taxed. The conversion also raises federal AGI, which can push the couple into the pension phase-out, make more Social Security taxable federally, raise Medicare premiums two years later through IRMAA, and lift total income past the property tax fairness credit limit. None of that argues against converting; it argues for counting the Maine tax, which is roughly $2,900 to $3,600 on $50,000, as part of the cost. Qualified Roth withdrawals later are not in federal AGI and so are never taxed by Maine.

The federal senior deduction, and the Maine age additions

The $6,000 federal deduction for people 65 and older, in effect for 2025 through 2028, is taken below the AGI line, and Maine Revenue Services has said the Legislature “did not choose to extend conformity” to it. It never reaches Form 1040ME. What Maine gives instead is an addition to its own standard deduction: $1,650 for each spouse 65 or older on a joint return, $2,050 for a single person or head of household, and the same again for blindness. A married couple both 65 claims $31,400 plus $3,300, or $34,700, before the $10,600 of personal exemptions. The additions are part of the standard deduction and phase out with it above $102,250 single or $204,550 joint of Maine AGI.

What Maine does tax in retirement

Interest, dividends and capital gains from a brokerage account, rental income, a part-time wage, a commercial annuity bought with after-tax money outside a retirement plan, nonqualified deferred compensation, and pension income above the cap are all Maine taxable income at the ordinary rates. Long-term capital gains get no lower rate. A retiree who sells a camp or a block of appreciated stock pays Maine 5.8% to 7.15% on a gain the IRS may tax at 0% or 15%.

Property tax relief for seniors

Maine’s property tax is levied and collected by towns and cities, and most relief is applied for at the town office, not on the income tax return. The one piece on the return is the property tax fairness credit, and it matters most to retirees because the maximum doubles at 65.

Amounts the State pays under the deferral program count as property tax paid for the fairness credit. The Property Tax Stabilization program, the “senior freeze” enacted for 2023, was repealed after one year and no longer exists; a return or a town form that mentions it is out of date.

Withholding and estimated payments

Because Social Security is untaxed and most pension income is deducted, many Maine retirees owe nothing and need no withholding. The ones who do owe are retirees with pension income above the cap, large IRA withdrawals, conversions, brokerage income or a gain on a sale. Pension payers will withhold Maine tax on request using Form W-4ME, and MainePERS offers Maine withholding. Otherwise the rule is the general one: estimated payments on Form 1040ES-ME are required when you expect to owe $1,000 or more after withholding and credits and owed $1,000 or more the year before, with the safe harbor at 100% of last year’s tax or 90% of this year’s. A retiree planning a conversion or a sale should make the payment in the quarter the income arrives.