by Barbara B. Cline
My husband Robert and I are both financial professionals. I am a licensed certified public accountant and former nonprofit executive. Robert is a former banking and insurance regulator with 40 years of federal service. In 2015, while preparing our DC tax return, Robert noticed a change.
The DC Council had revised DC tax policy. Robert – as well as other retired federal and District civil servants – could no longer eliminate or (“exclude” in tax language) up to $3,000 of retirement income from DC taxes.
This was a concern, but at the time $3,000 seemed too small an amount in our pre-Covid busy lives to investigate. But this year, the pandemic gave me the time to research DC’s tax policy change.
My concern soon escalated into dismay.
State vs. DC: Tax Treatment of Retirement Distributions
Thirty-eight of the 41 states with a state income tax provide at least a partial tax break to retired civil servants.
Our neighbor Maryland is one of these states. Maryland allows both its state and federal civil servants to exclude $31,100 of their retirement income from state income taxes.
Maryland also extends this $31,100 tax break to their non-government retirees. Retirees who receive “a pension, annuity or endowment from an ’employee retirement system’ qualified under Sections 401(a), 403 or 457(b) of the Internal Revenue Code.” See Maryland’s 2019 tax filing instructions (p.7 Line 10a – “Pension Exclusion”) for full details.
And how does DC compare? Since 2015, there have been zero DC tax breaks for both federal and DC retired civil servants, as well as non-government retirees.
(Further reading: NARFE’s 2019 State Tax Treatment of Federal Annuities handout summarizes state tax policies toward federal retirees. For full details on taxation of public and private retirement distributions, check the state’s tax website.)
Efforts are under way to restore and enhance the tax break. In January 2019, DC Council member Vincent Gray introduced the “Pension Exclusion Restoration and Expansion Act of 2019” (B23-0060). This bill (find full details here) would allow both DC and federal civil servant retirees to exclude up to $20,000 of their retirement income from DC income taxes.
This bill – and similar legislation preceding it – were unsuccessful. But a coalition of federal and DC civil servants – including teachers, firefighters and police officers – continues to work to restore a DC retiree income tax. Contact the Coalition to Restore DC’s Pension Benefit if you want to get involved.
As for Robert and me – we are staying in DC for now, because at this moment there is more to our DC lives than taxes. However, this Covid year has altered our reality.
Our decision – whether to stay in DC or move to a more tax-friendly state – will now include how our government and non-government retirement income is taxed.
Barbara B. Cline is a CPA and a former member of Ward 3’s IONA Senior Services Citizens Advisory Group, which researches and advocates issues impacting the lives of DC’s seniors. She also writes Forest Hills Connection’s “High-Rise Life” column.