Where the pension comes from does not matter. All pensions are excluded from state income if the payments are not early distributions, and no pensions are excluded from state income if the distributions are "early distributions".
The thought that state pensions are never taxable is a misunderstanding of state law.
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.
On the federal return, an "early" distribution is generally one in which the distribution is made before the taxpayer is 59 1/2 years old.
However, it is not clear that an early distribution on the federal level is also an "early" distribution for the State of Mississippi. But so long as your 1099-R has a distribution code of "2" in box 7, TurboTax will assume that the distribution is an early distribution.
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 is 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).
**Say "Thanks" by clicking the thumb icon in a post
**Mark the post that answers your question by clicking on "Mark as Best Answer"
