A DC-based federal worker in 1935 going over (what else?) taxes. (photo from loc.gov)
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.)
What now?
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.
ANDREW S. says
Barbara,
Thanks for this post!!
Barbara Kraft says
I appreciate what Barbara Cline is saying. Nevertheless, as a federal retiree married to another federal retiree, I count myself astoundingly fortunate. My husband and I are willing to pay taxes to support public services that benefit those in our community who do not have the income and wealth we do.
Green Eyeshades says
Thank you very much. You gave voice to rational, progressive wisdom.
Barbara Lappin says
I support Mrs. Cline 100%. I wish more would get on her bandwagon. For the past several years I have been complaining about this first with Jack Evans and then to CM Mcduffie. I have given up.
I have never gotten a reply that made any sense. Shame on the council members who have the highest salaries in the country.
Bill 23 which addresses these issues is always in the works and is never brought to the surface.
The federal retirees are primarily a group of citizens who have never asked for a handout and have provided a steady tax base.
It’s time the city give back to these folks and get in lock step with the rest of the country. The Council needs to say thanks.
Elizabeth McPike says
Where to begin….retired federal and state employees already have generous retirement plans. Why in the world add on a tax break, when there are so many people in this city who struggle to live on little more than Social Security! There is staggering inequity already, now gravely exacerbated by a pandemic that has disproportionately devastated the poor and working class. If there are tax dollars to spare, let’s hire tutors to help the students who, tomorrow and the next day and the next, will struggle to cope with online “learning” that is going to leave them yet further behind.
Green Eyeshades says
Wow! Great idea!
Barbara Lappin says
The government pension being generous is a short sighted comment. People who receive theses government retirement annuities do not receive social security. So to say that some underprivileged people have to live on the their social is the same as a government retiree.
Social Security income receives a modest tax benefit in DC while government pensions do not. So all things being equal the government retirement benefits aren’t quite as lucrative as social security. A generous government pension is an oxymoron.
Over the years these workers have steadily paid taxes to the city to provide relief for the poor among other things. Several years ago he council enacted a bill which took away health benefits from government retirees unless they purchase expensive plans or have 30 years of employment. The benefit which mattered the most was deleted.
So I think its fair that the council and the people of DC say thanks. After all many of these retirees are still here, and yep, continue to give taxes to the unfortunate or whatever the council decides.
Budges are fungible I might add and governments can prioritize as they see fit. There is no guarantee how the taxes are spent. All governments are not wise.
This group of retirees most likely has never asked for or received a handout.. Surely we can find tax relief from other revenues than on the backs of teachers, police officers and firemen. Every penny counts in retirement.
Harold Pskowski says
The D.C. Council made the correct move when it eliminated the $3,000 pension exclusion. LIke it or not, our government is funded by a tax on income and there is no reason why retirement income should be exempt from tax. The previous exclusion was also markedly discriminatory — it applied only to pensions of government employees, excluding private pensions and distributions from defined contribution plans such as 401(k)s and IRAs.
States like Maryland and Pennsylvania exclude pension income due to a fear that taxpayers will depart for low or no-tax states when they retire. But the evidence for this is weak, and the Maryland Legislature is reconsidering whether the exclusion is justified.