How do New York’s rules treat federal and state government pensions differently from private pensions?

1. Government pensions: a constitutional and statutory safe harbor

Pensions paid by New York State and local governments as well as federal and military pensions are treated as fully exempt from New York State income tax under existing law and state tax guidance, a rule reflected in state statute and retirement-system guidance that instructs retirees to subtract such government pension amounts from federal adjusted gross income when computing New York adjusted gross income ^{[1] [2] [4] [5] [3]}.

2. Federal and state pensions must be treated equally — the legal backdrop

New York’s exemption for government pensions also ties to a federal constitutional development: the U.S. Supreme Court’s decision in Davis v. Michigan Department of Treasury required states to provide equal tax treatment for federal and state/local pensions, a principle the New York Tax Expenditure documentation cites as part of the rationale for its subtractions and exclusions for government retirement pay ^[6].

3. Private pensions, IRAs and annuities: taxable but partly excluded for older taxpayers

By contrast, distributions from private pensions, employer 401(k) plans, IRAs and other non‑governmental annuities are generally taxable for New York purposes if they are included in federal adjusted gross income, although taxpayers who were age 59½ or older for the entire tax year may subtract up to $20,000 of qualified pension and annuity income when computing New York adjusted gross income ^{[4] [3] [7]}.

4. Proposed legislation seeks to narrow the gap with larger pension exclusions

To address what sponsors call an “inequity” between public‑sector and private‑sector retirees, bills introduced in the 2023 and 2025 sessions would increase the pension/annuity exclusion for eligible taxpayers from $20,000 to $25,000 , $30,000 , $35,000 and $40,000 in 2028 and thereafter — a phased approach designed to reduce the tax burden on private‑pension recipients while leaving government‑pension exemptions intact ^{[8] [1] [2]}.

5. Social Security and federal tax withholding: separate rules that matter to retirees

Social Security benefits are not taxed by New York State, even when taxed federally, which adds an extra layer to retirees’ state tax picture and differentiates Social Security from both public and private pensions under state law; separately, most New York State and Local Retirement System pensions remain subject to federal income tax and are reported on 1099‑R forms, with NYSLRS required to withhold federal income tax by default unless the retiree elects otherwise ^{[9] [10] [11] [12]}.

6. Competing narratives, fiscal tradeoffs and unanswered specifics

Supporters of expanding the private‑pension exclusion frame the change as fairness and affordability for retirees and point to federal tax changes as additional rationale, while critics (not detailed in the provided sources) typically argue about revenue impacts and benefits skewed to higher‑income retirees; the legislative text and state materials show the policy intent but do not quantify fiscal cost or distributional effects in the snippets provided, and the sources do not fully resolve how family filing permutations, survivor distributions, or out‑of‑state residence would interact with the proposed increases — matters that would require further revenue estimates and administrative guidance ^{[8] [6] [4]}.

7. Bottom line: a bright line and a middle ground

The bright legal line is that government pensions are effectively tax‑exempt in New York while private pensions are taxable but eligible for an age‑based subtraction currently capped at $20,000; pending legislation would raise that subtraction substantially over several years to reduce the gap between public and private pension treatment, but details on fiscal impacts and edge cases are not fully addressed in the available excerpts ^{[3] [1] [2] [8]}.