Social Security is a cornerstone of retirement plans for most Americans. According to the Center on Budget and Policy Priorities, without this program, nearly 4 in 10 retired Americans would live below the federal poverty line.
The difference between keeping all your benefits or losing a portion of them can significantly impact these households. Even those who retire with a solid financial foundation often rely on Social Security to balance their budgets.
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Taxes on Social Security Benefits for retirement
In nine states, residents might have to pay state taxes on a portion of their Social Security benefits this year, depending on their income levels.
Anyone receiving Social Security benefits should understand how these benefits are taxed at the federal level. The federal government taxes part of your benefits if your “combined income” exceeds certain thresholds.
Combined income is calculated by adding half of your Social Security benefits, your adjusted gross income, and any nontaxable interest.
These thresholds may seem low, and they are. Congress has not adjusted them for inflation in over 30 years, and there are no plans to do so in the future. However, benefits receive cost-of-living adjustments almost every year, which means more retirees are paying taxes on some of their Social Security benefits.
Careful planning can help you avoid a surprise on your tax return in April. Retirees receiving Social Security should consider how additional income from capital gains or withdrawals from retirement accounts will affect their overall tax bill. Moreover, retirees in nine states have an extra consideration.
The 9 States that tax Social Security
Most states do not tax Social Security benefits, and the number of those that do has been declining. For example, Kansas eliminated its tax on Social Security this year, effective for the 2024 fiscal year. However, nine states still impose taxes on some individuals’ benefits. If you live in one of these states, you should investigate your personal situation or consult a professional to see if there are ways to reduce your tax bill.
Colorado
In Colorado, taxpayers under 65 with more than $20,000 in taxable benefits on their federal tax return will need to pay state taxes on the amount exceeding that threshold. Retirees 65 and older are exempt from state taxes on Social Security benefits. The state tax rate is 4.4%.
Connecticut
In Connecticut, the portion of your Social Security income that is taxed at the federal level may be subject to state taxes if your adjusted gross income exceeds $75,000 for individuals or $100,000 for joint filers. However, the amount subject to state taxes is limited to 25% of your benefits, regardless of the percentage taxed federally. The tax rate ranges from 2% to 4.5%.
Minnesota
In Minnesota, taxpayers can deduct up to $4,560 as individuals or $5,840 for married couples filing jointly in Social Security benefits from their taxable income. This deduction starts to phase out for residents with combined incomes over $69,250 for individuals or $88,630 for married couples and is completely eliminated at combined incomes of $78,000 or $100,000, respectively. The state income tax rate ranges from 6.8% to 9.85%.
Montana
In Montana, any portion of your Social Security income that is taxed at the federal level is also subject to state taxes. The tax rate ranges from 4.7% to 5.9%.
New Mexico
In New Mexico, taxpayers with adjusted gross incomes exceeding $100,000 for individuals or $150,000 for married couples filing jointly must pay state taxes on any Social Security income that is also taxed federally. The state tax rate ranges from 4.9% to 5.9%.
Rhode Island
In Rhode Island, taxpayers below their full retirement age as defined by Social Security with adjusted gross incomes above certain thresholds must pay taxes on any portion of Social Security income that is also taxed federally. These thresholds were $101,000 for individuals or $126,250 for married couples filing jointly in 2023, but they adjust for inflation each year. The tax rate ranges from 4.75% to 5.99%.
Utah
In Utah, taxpayers with adjusted gross incomes over $45,000 for individuals or $75,000 for married couples filing jointly must pay taxes on any Social Security income that is taxed federally. Those below these thresholds qualify for a credit to offset the taxes. The tax rate is 4.65%.
Vermont
In Vermont, taxpayers with adjusted gross incomes over $50,000 for individuals or $65,000 for married couples filing jointly must pay taxes on at least a portion of any Social Security income included in their federal tax return. The tax rate ranges from 3.35% to 8.75%.
West Virginia
In West Virginia, 65% of any Social Security income included in your federal tax return is subject to state taxes. However, these taxes are being phased out. By 2025, 35% will be taxable, and starting in 2026, the state will stop taxing benefits altogether. The tax rate ranges from 2.55% to 5.525%.
Don’t Make Retirement Decisions Based Solely on Taxes
While retirees in these nine states may face additional taxes, it’s essential to consider the overall picture in retirement. Hopefully, you will enjoy a long retirement, and state tax policies can change drastically over time. Many states have taken steps to reduce or eliminate their Social Security taxes in recent years.