SCOTUS: No Discrimination Against Federal Retirees In State Taxes
Last week, the U.S. Supreme Court issued a unanimous decision in the case of Dawson v. Steager, striking down West Virginia's attempt to treat the pension of a retired U.S. Marshal differently than pensions paid to retired state law enforcement officers.
Under 4 U.S.C. § 111, a state may not treat retired state employees more favorably than comparable federal government retirees. Here, West Virginia taxed the pension benefits of a retired U.S. Marshal, but not retired state law enforcement officers. West Virginia tried to mount several defenses for this discriminatory tax structure, but all of them were rejected by the Supreme Court.
Writing for the Court, Justice Gorsuch explained that "if a State exempts from taxation all state employees, it must likewise exempt all federal employees. Conversely, if the State decides to exempt only a narrow subset of state retirees, the State can comply with § 111 by exempting only the comparable class of federal retirees."
The case highlights an important consideration for retirees. Not all states grant the same tax exemptions to government retirees. And some states, as this case shows, even try to treat similarly situated state and federal government retirees differently. Again, federal law does not prohibit a state from favoring certain categories of state retirees so long as comparable federal employees receive the same tax benefits.
Retirees who move between states sometimes find surprises in their tax returns after resettling in their new home states. Careful financial planning prior to deciding on the best place to retire should include consideration of what state taxes will be owed.