DISCLAIMER NOTICE: HCRS staff are not qualified to provide specific advice relative to the federal tax code. You should consult your personal accountant, tax consultant and/or obtain a copy of IRS Publication 575, Pension and Annuity Income, to ensure that you are in compliance with all of the appropriate federal requirements. The following is general information only.
Your pension benefit is exempt from Massachusetts State Income Tax. However, if you move to another state after retirement, your allowance may be subject to that state's income taxes. It is advisable to check with the other state's department of revenue for further information.
The federal government (IRS), will tax a large portion of your retirement allowance immediately upon retirement. Approximately 95-98% will be taxable at the federal level.
Upon your retirement, you will be required to complete a W–4P Form to begin a monthly federal tax withholding. It is very important that you complete a tax withholding form in conjunction with your retirement. If no form is filed with your retirement board, the retirement board is required by federal law to withhold taxes, starting with your second retirement check, as if you were a married person with three exemptions. You may request that no taxes be withheld from your pension check. However, if no taxes are withheld, you should submit estimated quarterly payments to the IRS. You may change your federal tax withholding amount at any time during your retirement simply by notifying us.
Your tax liability will be determined by using the Internal Revenue Service's Simplified Method. The tax-free portion depends on the amount of your after-tax contributions to the retirement system, when your contributions were made, and your life expectancy at the time of your retirement.
Since January of 1988, all contributions to the retirement system were/are made on a pre-tax basis (taxes must be paid upon receipt of benefits). Only contributions made prior to January of 1988 and any purchases of creditable service are after-tax dollars eligible for exclusion from federal taxes. Pre-tax contributions and all of the interest which your account has earned is taxable upon receipt of benefits.