Social Security is a major component of nearly every American’s retirement budget. About half of households with someone 65 or older receive at least 50 percent of their income from Social Security, and about a quarter receive at least 90 percent of their income from the program.
With the importance of Social Security benefits to so many retirees, it’s important to save every penny if you can. Unfortunately, for people living in nine states, there’s a chance they’ll see a reduction in those monthly checks. Depending on your income, your state may tax a portion of your benefits.
Here’s what you need to know.
How to Keep More of Your Social Security Benefits
Before we focus on the individual states, we need to first look at how the federal government taxes the benefits they receive.
The U.S. government uses a measure called “combined income” to determine what portion, if any, of your Social Security benefits are subject to income tax. Combined income is the sum of half of your Social Security income, your adjusted gross income, and any untaxed interest income. If your income exceeds the thresholds listed below, you will have to pay regular income taxes on a portion of your benefits.
|
Taxable portion of benefits |
Combined income, individual |
Combined income, married couples filing jointly |
|---|---|---|
|
0% |
Less than $25,000 |
Less than $32,000 |
|
Up to 50% |
$25,000 to $34,000 |
$32,000 to $44,000 |
|
Up to 85% |
More than $34,000 |
More than $44,000 |
Data source: Social Security Administration.
You’ll notice that those thresholds are extremely low. That’s because Congress hasn’t updated those numbers for inflation since they were first created in the 80s and 90s. As such, more and more retirees are losing more and more of their benefits to taxes each year.
However, you can avoid paying taxes on your Social Security income with proper tax planning. If you can put more of your retirement savings into Roth accounts, withdrawals from those accounts will not count toward your combined income.
Still, you should pay close attention to your capital gains and traditional retirement account withdrawals, plus any interest on your cash holdings. Every penny counts when it comes to keeping your Social Security benefits tax-free.
As if that weren’t enough, retirees in nine states must also consider the potential burden of state taxes.
9 States That Tax Social Security
Many states don’t tax Social Security benefits, and the number of states that do is shrinking. For example, Missouri and Nebraska have eliminated their Social Security taxes in recent years (starting in 2024), and Kansas eliminated them this year (effective immediately). There are only nine states left that will tax Social Security in 2024.
If you live in one of the following states, take the time to do some additional research to see how the state tax law affects your situation. You may find it helpful to consult a professional tax planner to help you reduce your tax bill this year or in the future. It pays to plan ahead for taxes during your retirement.
Below you will find the basic principles for each state.
Colorado: Taxpayers under age 65 with more than $20,000 in taxable benefits on their federal income tax returns pay state income tax on the amount above that threshold. Retirees age 65 or older are exempt from taxes on Social Security benefits. The state tax rate is 4.4%.
Connecticut: Any Social Security income reported on your federal income tax return may be subject to Connecticut taxes if your adjusted gross income exceeds $75,000 for individuals or $100,000 for joint filers. However, the amount is limited to 25% of your benefits received, regardless of what percentage appears on your federal return. The tax rate ranges from 2% to 4.5%.
Minnesota: Taxpayers can deduct up to $4,560 as an individual or $5,840 for a married couple filing jointly for Social Security from their taxable income. That amount is reduced for residents with an adjusted gross income above $78,000 for an individual or $100,000 for a married couple, before being phased out completely at incomes of $118,000 or $140,000, respectively. The tax rate ranges from 6.8% to 9.85%.
Montana: All Social Security income on a federal income tax return is subject to state income tax. The tax rate ranges from 4.7% to 5.9%.
New Mexico: Taxpayers with an adjusted gross income of more than $100,000 for individuals or $150,000 for married couples filing jointly pay taxes on all Social Security income that are also taxed at the federal level. The tax rate ranges from 4.9% to 5.9%.
Rhode Island: Taxpayers under their full retirement age, as defined by Social Security, with an adjusted gross income above a certain threshold pay taxes on any portion of their Social Security income that also appears on their federal income tax returns. Those thresholds used to be $101,000 for individuals or $126,250 for married couples filing jointly in 2023, but they are adjusted each year for inflation. The tax rate ranges from 4.75% to 5.99%.
Utah: Taxpayers with an adjusted gross income of more than $45,000 for individuals or $75,000 for married couples filing jointly must pay taxes on all Social Security income reported on their federal tax returns. Those who fall below the threshold are eligible for a tax credit to offset the taxes. The tax rate is 4.65%.
Vermont: Taxpayers with adjusted gross incomes above $50,000 for individuals or $65,000 for married couples filing jointly pay income tax on at least a portion of the Social Security income included on their federal income tax return. The tax rate ranges from 3.35% to 8.75%.
West Virginia: In total, 65% of Social Security income included on a federal income tax return is subject to state income tax. The Social Security tax rate will gradually decrease over time: 35% will be taxable in 2025 and 0% will be taxable beginning in 2026. The tax rate ranges from 2.55% to 5.525%.
How to Decide What State to Retire in
True, retirees in the nine states above face the added challenge of state taxes that potentially erode their all-important Social Security retirement benefits. But Social Security taxes are not a good reason to choose which state to live in for retirement.
First, tax laws are constantly changing. The current trend is for more and more states to eliminate taxes on Social Security income. It is entirely possible that all of the states listed above will eventually eliminate the tax. West Virginia already has legislation in place to eliminate it in 2026.
More important considerations are the cost of living and what the community has to offer retirees. If you want to live happily, scraping together a few extra dollars in tax savings doesn’t compare to a 15% reduction in your cost of living and a vibrant senior community with social activities. Those factors can have a much bigger impact on your quality of life than worrying about your tax bill in April.
That said, if the state you choose to live in taxes your Social Security income, there are many different ways to avoid the tax bill without changing where you live. The earlier you plan for potential taxes during retirement, the better chance you have of reducing or avoiding the burden entirely. As mentioned, a professional planner may be worth the price if you live in one of the states listed above and are concerned about taxes.
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Retirees in These 9 States Are at Risk of Losing Some of Their Social Security Benefits was originally published by The Motley Fool
