New York for retirees: Social Security and government pensions untaxed, $20,000 for everything else

New York is generous to retirees in a particular shape, and the shape surprises people coming from Illinois or Pennsylvania, where all retirement income is exempt. Social Security is never taxed, at any age or income. A pension from New York State, a New York local government, the federal government or the military is never taxed either. Everything else, a private employer’s pension, an IRA, a 401(k), an annuity, a Roth conversion, gets a $20,000 exclusion per person once that person is 59½, and the rest is taxed at the ordinary rates, 5.4% for most retirees. A retired teacher with a $60,000 state pension owes New York nothing on it. A retired engineer with a $60,000 pension from a private company owes tax on $40,000 of it. Same town, same income, very different return.

The three subtractions sit on consecutive lines of Form IT-201 and work independently. Line 26 takes out government pensions in full. Line 27 takes out Social Security in full. Line 29 takes out up to $20,000 of what is left of pension, annuity and IRA income. A couple can use all three on one return.

Social Security: line 27

Whatever portion of Social Security or Tier 1 railroad retirement was taxed federally is in federal AGI, and all of it comes off on line 27. If 85% of a $40,000 benefit, or $34,000, is taxed federally, $34,000 is subtracted. There is no age test and no income limit. The subtraction is of the federally taxable amount, not the gross; if the federal formula taxed none of the benefit, there is nothing to subtract and nothing to tax.

Government pensions: line 26

Pensions from New York State and its local governments, including the state and city teachers’ retirement systems and the listed public authorities, and pensions from the United States, “any agency or instrumentality of the United States (including the military),” are subtracted in full, at any age, to the extent they were included in federal AGI. A 55-year-old retired police officer and a 90-year-old retired federal clerk both qualify. Two things do not: a pension from another state’s government, which gets only the $20,000 exclusion on line 29, and a 457 or 403(b) account that the government employee funded with their own deferrals (verify). Members of the SUNY and CUNY Optional Retirement Program subtract only the part attributable to state or CUNY employment.

The $20,000 exclusion: line 29

The rules, from the Department of Taxation and Finance’s own page for retired persons:

• You must be 59½. If you were 59½ for the whole year, up to $20,000 of qualified pension and annuity income is excluded. If you turned 59½ during the year, only payments received on or after that date count.
• Qualified income means periodic payments from an employer plan, IRA distributions including SEP and SIMPLE, 401(k) and 403(b) distributions, annuity payments, and lump sums taxed as ordinary income. A Roth conversion is an IRA distribution and qualifies.
• Each spouse has a separate $20,000, and neither can use the other’s unused amount. A husband with $35,000 of IRA withdrawals and a wife with $5,000 exclude $25,000, not $40,000.
• A beneficiary receiving a decedent’s pension or IRA can claim the decedent’s exclusion if the decedent would have qualified, shared among all beneficiaries, and the total of the decedent’s own exclusion and the beneficiaries’ cannot exceed $20,000 for the year.
• The pension exclusion and the disability income exclusion on Form IT-221 together cannot exceed $20,000.

The exclusion has been $20,000 since 1981 and is not indexed. In 1981 it covered a comfortable pension; today it covers a third of one. There is a recurring bill in Albany to raise or index it, and it has not moved.

Roth conversions

A Roth conversion is taxed by New York as an IRA distribution in the year of the conversion, at the graduated rates, after the $20,000 exclusion if you are 59½ and have not used the exclusion on other income. For someone under 59½ there is no exclusion at all; the whole conversion is taxed. For someone over 59½ already drawing $20,000 or more of pension or IRA income, the exclusion is spent and the conversion is taxed in full. Only a retiree with little other pension income has room.

Two things make New York kinder to conversions than its rates suggest. First, Social Security and government pensions do not count toward the exclusion; a retired state worker with a $50,000 pension and $30,000 of Social Security has all $20,000 of the exclusion available for a conversion. Second, STAR income is federal AGI minus taxable IRA distributions, so a conversion does not cost a senior Enhanced STAR, which the section below explains. What a conversion does do, on both returns, is raise AGI, which can push more Social Security into the taxable range federally, raise Medicare premiums through IRMAA two years later, and shrink New York’s itemized deductions.

The federal senior deduction

The $6,000 federal deduction for people 65 and older, in effect for 2025 through 2028, comes off after adjusted gross income, alongside the standard deduction. New York starts from AGI, so the deduction never reaches the IT-201 and no add-back is needed. The same is true of the extra federal standard deduction for age. New York gives seniors no age-based deduction of its own; what it gives instead is the Social Security subtraction, the $20,000 exclusion, Enhanced STAR at 65, and the $375 real property tax credit for low-income households with a member 65 or older.

Property tax relief

For a New York homeowner the property-tax programs are worth more than anything on the income tax return, and they run through two different offices.

The Department of Taxation and Finance runs STAR for anyone who bought after 2015; it is not something the assessor can grant. The senior citizens exemption and veterans exemptions are the assessor’s. A homeowner can hold Enhanced STAR and the senior exemption at once.

Two things about STAR trip up retirees. The income test looks two years back, so 2026 benefits use the 2024 return, and a year with a large one-time gain can cost a year of Enhanced STAR two years later. And the definition of income subtracts taxable IRA distributions but not pension income, so a couple living on a $100,000 private pension and $30,000 of Social Security has STAR income of about $125,500 and misses Enhanced STAR, while a couple drawing $60,000 from IRAs and the same Social Security has STAR income of about $25,500 and qualifies easily.

Withholding and estimated payments

Pension payers are not required to withhold New York tax, and many do not unless asked. A retiree whose pension is from the government, or whose private pension and IRA income is under the exclusion, usually needs no withholding. A retiree with a private pension well over $20,000, large IRA withdrawals or a taxable brokerage account should either file Form IT-2104-P with the payer or make quarterly payments on Form IT-2105. New York requires estimated payments when $300 or more of tax is expected after withholding, a much lower trigger than the federal $1,000, and the penalty runs from each missed quarterly date.

Moving in, moving out

Federal law since 1996 bars a state from taxing the retirement income of someone who no longer lives there, so a New York pension paid to a Florida resident is Florida’s to tax, and Florida does not. The reverse holds too: a New Yorker who retires to North Carolina pays North Carolina on the IRA withdrawals New York would have taxed. What a retiree leaving New York has to prove is that the move was real: New York audits changes of domicile closely, and a retiree who keeps the Westchester house and spends 184 days a year in it is still a New York resident whatever the Florida driver’s license says. The tests and the checklist are in Moving to New York.