Wisconsin for retirees: Social Security untaxed, the $24,000 subtraction at 67, and what it costs

Three rules decide what a Wisconsin retiree owes. First, Social Security is never Wisconsin income: whatever amount was taxed federally is subtracted in full on Schedule SB, at any age and any income. Second, pensions, 401(k) withdrawals and IRA distributions are Wisconsin income, taxed at the ordinary rates of 3.50% to 7.65%, with exceptions for military retirement and a few government pensions. Third, from the year a person turns 67, up to $24,000 of that retirement income comes off, up to $48,000 on a joint return when both spouses are 67. The third rule has a price: a return that claims the subtraction may not claim any Wisconsin income tax credit that year, and the credits given up do not carry forward. For most retirees the subtraction is worth more than the credits. For a low-income senior who qualifies for the homestead credit, or a snowbird who pays tax to another state, it can be the wrong choice. The subtraction is optional, and the return should be run both ways.

The rest of a retiree’s income is taxed as anyone else’s is: interest, dividends, rent and part-time wages in full, long-term capital gains at 70% after the 30% exclusion on Schedule WD. Medicare and other health insurance premiums paid with after-tax money are subtracted, which matters more to retirees than to anyone else. And at 65 each spouse gets an extra $250 exemption on top of the $700.

What is always exempt

The December 31, 1963 date is strict. A teacher who joined the Wisconsin Retirement System in 1970 has a taxable pension; one who joined in 1962 does not. Thrift Savings Plan payments and ordinary Wisconsin Retirement System pensions are taxable, subject to the subtractions below.

The retirement subtraction at 67

The 2025 state budget created this subtraction for tax years beginning in 2025, and a follow-up law in April 2026 settled the details. A person who is 67 or older on December 31 may subtract up to $24,000 of payments from qualified retirement plans and IRAs that are not already exempt. On a joint return the limit is $48,000 if both spouses are 67 at year-end and $24,000 if only one is. There is no income limit.

What qualifies. Pensions from employer plans, 401(k), 403(b) and 457 distributions, traditional IRA withdrawals, required minimum distributions, distributions from an inherited IRA, and amounts converted to a Roth IRA, since a conversion is a taxable IRA distribution. What does not. Payments from a commercial annuity bought outside a retirement plan, life insurance contracts, charitable gift annuities, and anything that is already exempt, such as military retirement. Social Security is not part of the computation at all; it comes off separately and in full.

The catch. A return that claims the subtraction may not claim any Wisconsin income tax credit for that year. That includes the school property tax credit (up to $300), the itemized deduction credit, the married couple credit (up to $480), the child and dependent care credit, the Wisconsin earned income credit, the credit for net tax paid to another state on Schedule OS, and the homestead credit (up to $1,168). Credits that would have carried forward are lost for the year as well. The subtraction is elective, so the question each year is simple: is the Wisconsin tax saved by the subtraction larger than the credits it costs?

For a couple with a pension and an IRA, the answer is almost always yes. A $48,000 subtraction in the 4.40% bracket saves about $2,100 of tax before counting the standard deduction it restores, against a $300 property tax credit. The exceptions are retirees whose Wisconsin tax is already near zero without the subtraction, retirees with a large Schedule OS credit for tax paid to another state, and grandparents raising grandchildren who have an earned income or dependent care credit.

Part-year residents prorate the $24,000 by the ratio of Wisconsin income to federal AGI on Form 1NPR. Nonresidents cannot claim it, and do not need to: qualified plan and IRA distributions received by a nonresident are not Wisconsin income in the first place.

The $5,000 subtraction at 65

An older, smaller subtraction remains on Schedule SB. A person 65 or older with federal AGI under $15,000, or a married couple with combined federal AGI under $30,000 whether filing jointly or separately, may subtract up to $5,000 of retirement income. It does not cancel any credits. For most people who meet the income test the standard deduction already eliminates the tax, so it rarely changes anything, but it is there.

Roth conversions

A Roth conversion is a taxable distribution from a traditional IRA, and Wisconsin treats it as one. Before 67, the full amount converted is Wisconsin income, taxed at the ordinary rates. A single filer with $60,000 of other income who converts $60,000 pays about $3,180 of Wisconsin tax on the conversion at 5.30% plus roughly $380 more from the standard deduction the extra income phases out. From 67, the conversion qualifies for the retirement subtraction, so a person who converts $24,000 a year, or a couple both 67 who convert $48,000, pays no Wisconsin tax on it, at the cost of that year’s credits. The timing lesson is plain: a retiree planning a series of conversions pays Wisconsin tax on the ones done before 67 and may pay none on the ones done after.

The federal side is unchanged by any of this. A conversion raises AGI, which can make more Social Security taxable federally and raise Medicare premiums two years later through IRMAA. Neither effect reaches the Wisconsin return, since Wisconsin subtracts all taxable Social Security regardless of the amount.

The federal senior deduction, and why it does not help here

The $6,000 federal deduction for people 65 and older, in effect for 2025 through 2028, is taken after adjusted gross income. Form 1 starts from AGI, so the deduction never reaches Wisconsin, and no add-back is needed because nothing was taken out. The same is true of the extra federal standard deduction for age. Wisconsin’s own breaks for age are the $250 additional exemption at 65 for each spouse, and the $24,000 retirement subtraction at 67.

Three lines retirees miss

Medical care insurance premiums. Medicare Part B and Part D premiums, Medigap and Medicare Advantage premiums, and marketplace premiums net of the federal credit, when paid with after-tax money, are subtracted on Schedule SB line 6. There is no 7.5% floor. Long-term care insurance premiums go on line 7. A couple paying $7,000 a year in Medicare and supplemental premiums saves about $300 of Wisconsin tax in the 4.40% bracket.

The 30% capital gain exclusion. A retiree who sells appreciated stock held more than a year reports the gain on Schedule WD, where 30% comes off before the rest is taxed. The excluded 30% does not count toward the retirement subtraction limit or against it; the two work independently.

The itemized deduction credit. Schedule 1 gives a credit of 5% of the amount by which medical expenses (reduced by the premiums already subtracted), mortgage interest, charitable gifts and casualty losses exceed the Wisconsin standard deduction. A retiree whose standard deduction has phased down and who has heavy medical or nursing costs can get a real credit here, and it is one of the credits the 67+ subtraction cancels.

Property tax relief

Wisconsin has no senior property tax freeze and no general homestead exemption. Relief comes in two places: on the December property tax bill, and on the income tax return.

The homestead credit’s income test is the one that counts Social Security, which the income tax ignores. A couple living on $30,000 of Social Security and a $6,000 pension is over the $24,680 limit even though their Wisconsin taxable income is zero.

Withholding and estimated payments

Retirees are not exempt from estimated payments the way they are in states that leave retirement income alone. Before 67, every dollar of pension and IRA income is Wisconsin income; after 67, everything above $24,000 or $48,000 is. The threshold for estimated payments is $500 of expected tax after withholding and credits, and the safe harbor is 90% of this year’s tax or 100% of last year’s. The simplest fix is to have Wisconsin tax withheld from the pension or from IRA distributions, which payers will do on request. Estimates go on Form 1-ES, due April 15, June 15, September 15 and January 15.