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How is a pension taxed?

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Pensions are usually taxable at a rate that depends on the retiree's current income level, according to Sandra Block for Kiplinger. If the pension includes after-tax contributions, this portion is exempt from taxes. The rules apply to both private and public pensions. As of 2015, retirees must begin making required minimal withdrawals from some tax-deferred savings plans beginning at age 70 1/2, which may increase his tax rate and decrease the amount of money remaining from a pension plan.

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Social Security may also be taxable income, explains Block. The government considers the retiree's provisional income in determining whether taxes are due on the money. For the 2014 tax year, the Internal Revenue Service required single retirees with a provisional income of over $25,000 to pay taxes on 50 to 85 percent of their Social Security benefits. Married taxpayers became responsible for taxes with provisional incomes beginning at $44,000.

The tax burden is not limited to the federal government, states Emily Brandon for U.S. News & World Report. Most states require taxes on pensions and Social Security. As of 2010, there were 12 states that did not charge taxes on these types of funds. However, these states may charge more in property taxes, offsetting any savings in income tax.

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