The state of Mississippi says this,
“Is retirement income taxable?
Generally, retirement income, pensions and annuities are not subject to Mississippi Income tax if the recipient has met the retirement plan requirements. Early distributions are not considered retirement income and may be subject to tax. ”
See this Mississippi FAQ.
Note that this applies to all pensions, not just pension for state employees.
I assume that on your 1099-R, the distribution code is "2". This describes the distribution as an early distribution. Therefore, based on the input, TurboTax is correctly marking the distribution as taxable in Mississippi.
However, the distribution is an "early distribution" for federal purposes, where generally retirement plan distributions made before the taxpayer if 59 1/2 are considered early.
What is not clear is if the state of Mississippi considers a distribution that is prior to age 59 1/2 to be an early distribution if the taxpayer has reached the full retirement age of the retirement plan.
Currently, TurboTax has no way of determining that the taxpayer has met the retirement plan's requirement.
If you are positive that the pension distribution should not be taxable in Mississippi, there are two workarounds:
The first is to change the distribution code to "7" on the W-2. This will cause the distribution to not be taxable in Mississippi. It will not affect your federal return (the distribution will still be taxed on the federal return, as it should be).
The second is to go into the Mississippi interview and proceed to the screen with the title "Enter Any Other Income or Losses". On this screen, enter the description of "Adjustment for pension" and the amount of the distribution as a negative number. This will back the pension distribution out of Mississippi taxable income.
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