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13 States That Tax Social Security Income

Retiring isn't easy, so give yourself a big pat on the back if you've been able to kick your feet up and enjoy the fruits of decades of diligent saving and investing.

But just because you're retired, or approaching the age at which you can begin taking retirement benefits via Social Security (62 years old), that doesn't mean you'll necessarily be entitled to every penny you expect to get.

Source: Social Security Administration via Wikimedia Commons.

13 states that tax your Social Security income

The vast majority of U.S. states do not tax Social Security income, which is good news for retirees, especially since we're living longer as a nation and may need our nest eggs to last longer than originally anticipated. According to the Social Security Administration, the maximum benefit for a worker retiring at full retirement age (66) is $2,642 in 2014. This maximum benefit is reviewed annually and is adjusted (usually higher) based on changes in the cost of living. 

However, some retirees may not see their total benefits, as 13 U.S. states actually tax Social Security as ordinary income. Just for clarity's sake, keep in mind that these 13 states don't tax every penny of your Social Security income. Some states mirror the way Social Security is taxed on the federal level, while others have their own set of rules that they go by. But for current retirees and those who are nearing retirement age, it simply means that where you live can have a meaningful impact on how much you get out of Social Security.

The 13 states, as well as the top and bottom marginal tax rates that determine your level of taxation, are as follows:

State

Minimum Marginal Tax Rate

Maximum Marginal Tax Rate

Colorado

4.63%

4.63%

Connecticut

3%

6.7%

Kansas

3.5%

6.45%

Minnesota

5.35%

7.85%

Missouri

1.5%

6%

Montana

1%

6.9%

Nebraska

2.56%

6.84%

New Mexico

1.75%

4.9%

North Dakota

1.51%

3.99%

Rhode Island

3.75%

9.9%

Utah

5%

5%

Vermont

3.55%

8.95%

West Virginia

3%

6.5%

Colorado and Utah have a flat marginal tax rate. Source: Socialsecuritychoices.com.

Of course, taxation of Social Security on a state level is not cut-and-dried.

In Minnesota, North Dakota, Nebraska, Rhode Island, Vermont, and West Virginia, citizens are taxed on their Social Security income without exemption. However, in Utah, Connecticut, Colorado, Kansas, Missouri, New Mexico, and Montana, some citizens are exempt from taxation on Social Security benefits. It often just depends on where their adjusted gross income lands on a state-by-state basis, except in New Mexico, where taxable benefits may qualify for an exemption based on income and age.

Residents of Iowa -- which, you'll note, I left off this list -- will be freed from taxation on Social Security income this year, at the end of a multiyear Social Security tax levy phaseout.  

Source: Ken Wilcox via Flickr.

Ways to beef up your Social Security benefits

Retirees and prospective retirees would certainly like to avoid taxation as much as possible and get the most out of their Social Security benefits. One obvious way to accomplish that is to consider retiring in one of the 37 states that do not tax Social Security benefits. Of course, you'll also want to consider other taxable implications, such as property and sales taxes that vary by state or even county. They can also have a meaningful impact on how far your dollar goes.

For younger workers, as well as those who are nearing retirement age or have already retired, maximizing Social Security benefits starts with making smart decisions.

Younger adults should focus on working as many years as possible. Although workers only need to earn the equivalent of $4,640 annually over 10 years in order to qualify for Social Security benefits, the Social Security Administration will average a worker's 35 years of highest income to determine that individual's benefit level. In other words, someone who works less than 35 years will get a zero for each year up to 35 that he or she didn't work. It pays to work a full 35 years in order to get your maximum benefit.

For retirees or near-retirees, the prudent course of action might be to wait to take Social Security benefits.

Everyone's situation is unique, but waiting could be a smart move for those individuals who can comfortably rely on other forms of retirement income (e.g., 401(k) and IRA income) to cover their expenses through age 70. The longer you wait to take your distribution up to that age, the higher it will be. On average, an individual who waits until age 70 to take the distribution will receive a 76% higher monthly benefit compared to those who gave the green light at age 62. That's no pocket change.

Another option, for those who claimed Social Security benefits within the past 12 months (key phrase there), is to file form 521. Form 521 is essentially a Social Security "do-over." If a beneficiary regrets taking the distribution before age 70 and wants to wait longer to accrue a larger future benefit, that person can file form 521, pay back all Social Security disbursements received to that point, and start over as if nothing ever happened.

Here's how you can get even more income during retirement

Social Security plays a key role in your financial security, but it's not the only way to boost your retirement income. In our brand-new free report, our retirement experts give their insight on a simple strategy to take advantage of a little-known IRS rule that can help ensure a more comfortable retirement for you and your family. Click here to get your copy today.


Read/Post Comments (14) | Recommend This Article (78)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On August 16, 2014, at 9:11 PM, BillD64 wrote:

    You forgot that as of 2014 North Carolina fully taxes Social Security and Pension Payments. I moved to NC from NY State at the end of December 2013 so my State income was all in NY for 2013. The NY State payment came to about $900. Turbo Tax estimates my 2014 NC State Income Tax will be $3700 for the same income. With exorbitantly high personal use taxes on vehicles, not so low property taxes and high state income tax NC is not a low tax state for Seniors.

  • Report this Comment On August 16, 2014, at 9:28 PM, 1altb wrote:

    I was just curious. Is social security taken before or after federal income tax? If it is after federal income tax is it taken on the remaining balance or the same gross as the income tax? The same question for state income tax.

  • Report this Comment On August 16, 2014, at 9:35 PM, harviele wrote:

    States which have a state sales tax does in effect tax social security benefits. There is no exemption from sales taxes for those who are on social security.

  • Report this Comment On August 16, 2014, at 9:56 PM, aaf1954 wrote:

    harviele..you think because your on social security you shouldn't have to pay sales tax? how do you think states maintain roads,bridges etc??? Because we are getting older doesn't exempt us from continuing to support the communities in which we live

  • Report this Comment On August 16, 2014, at 10:07 PM, nzk91g wrote:

    13 States not to retire in.

  • Report this Comment On August 16, 2014, at 11:47 PM, agentdd wrote:

    do any of these states take into account that they taxed the money that you put into SS and give any credit or do they just double tax it? Do they also do the same with other savings and tax anything you take out of your savings without regard to what you put in?

  • Report this Comment On August 17, 2014, at 9:11 AM, ObamaTHEmuslim wrote:

    Oklahoma taxes social security.

  • Report this Comment On August 17, 2014, at 1:12 PM, ForgivenBuilder wrote:

    SOCIAL SECURITY RETIREMENT INCOME AND PENSION INCOME ARE NOT “LABOR-INCOME!” Once fully retired from his or her labor-working days, Americans are no longer reachable and no longer touchable by income-invading TAXATION-VIRUSES! And hence, their retirement incomes on which they had already been taxed are NOT subject to further/additional/extra Taxation! Period: End of story! Those 13 States are perpetrating the vilest and most cruel form of injustice. So now, after working all their lives, government officials are telling retirees: “Retirement is hazardous to your life; you should’nt even be breathing, you naïve taxation revenues serf!” These retirees labored all their working lives PAYING TAXES, especially FICA and Social Security Taxes! Their incomes and wages and salaries HAVE ALREADY BEEN TAXED! And now that they're finally enjoying the rest of their days before they die, the government walks-again into their lives to pilfer the saving-fruits of their lifelong labors! It's as if the government considers their retiring days as a form of taxable labor income! Social Security and pensions and retirement income ARE NOT wages/salaries for work done and therefore cannot be taxed! That is unconstitutional! Which "employer" is being taxed then! NO RETIRED SENIOR/LABORER/WORKER can be taxed by government once fully retired in accordance with the rule of law! Those States are in gross violation of our form of free government and form of constitutional jurisprudence! Those public officials in those States are motivated by unconscionable freed, corrupt covetousness and perverted avarice! The gall! Majority of these retirees are probably suffering from long-term illnesses like diabetes, heart problems, high blood pressure, rheumatoid arthritis, cancer, Lou Gehrig’s Disease, incontinence, etc..., which might impair enjoyment of the remainder of their days on this Earth! Those States' officials are pilfering retirees' meager retirement incomes in order to not only limit seniors' activities and political participation but also to fatten their own bank accounts, but at the expense of retired seniors who had already shouldered a heavy tax burden when they were working! This is double jeopardy: Taxing Social Security Benefits is unconstitutional, unlawful, illegal and thus UnAmerica! Long live retired workers and laborers who spent their youthful energies building our great nation! There has to be a class action lawsuit against those 13 States-- hopefully endorsed by the lame AARP advocacy group--- on behalf of all seniors and retirees, in the same manner there was a class action lawsuit on behalf of smokers against all cigarette-making corporations! Go “get'em” retirees! Don't put up with this: It is flagrant highway robbery adding insult to injury! God bless you! And God bless the United States of America!

  • Report this Comment On August 17, 2014, at 7:34 PM, garysund wrote:

    In a few short months I am going to retire from working for the railroad. I am happy to be able to continue to live in California where there is 100% no stare tax on any of my railroad retirement. Also most of that is even federal tax exempt. Good thing or I would move to a different state like Nevada that has a zero state tax rate.

  • Report this Comment On August 17, 2014, at 9:03 PM, meeeto wrote:

    You left out Michigan ' Governor Snyder the Snake gave big tax breaks to his partners and started taxing ss, pensions, Vets disability...

  • Report this Comment On August 17, 2014, at 9:54 PM, jp1969 wrote:

    It's a real shame that our government is taxing our hard earned money multiple times.They are as crooked as the day is long.They are supposed to be working for us,not against us as they do.I'm tired of getting screwed by them,aren't you !

  • Report this Comment On August 17, 2014, at 10:53 PM, 12gageshotgun wrote:

    Sorry,Sorry Sorry....states that tax social security. Are they that hard up for $$$...I will bet their Wal Mart parking lots are full! States giving tax incentives to lure BIG business....LOW Down Dirty shame....Tell me powers that be...What are the'SLOT BABIES'...I KNOW...Now you tell me & others....Social Security was used to (as Gen. GSP) called it---Great WW2 to finance WW2....And the Hopkins Estate---Centeral Pacific RR....OK All you geniuses, Lawyers. MIT grads figure it out! Seniors on SS should be drawing about twice what they are drawing!!!!

  • Report this Comment On August 17, 2014, at 11:01 PM, 12gageshotgun wrote:

    ANY BODY & I mean every body retired should not HAVE TO PAY TAXES!!! You get a card at the super market to get the discount on food----SO WHY not give all seniors a card to be tax exempt>>>>> NOR should have to serve on Jury duty.....Any out there care to respond?????

    Then these young people do not understand the Law & they must have an ole F**T to understand something about the law.

  • Report this Comment On August 19, 2014, at 9:35 AM, TonyBologna65 wrote:

    We today are in a quandary but as the voters box shows, we got here by people voting for the way we are.

    So next time you all go speaking with hast and aggravation remember, it was your vote that counts weather you use it or not, it's your choice.

    Try working on your real voice on Capitol Hill, bring back the real people that lead us instead of bleed us. We as a nation can recondition our government but first we need to rethink what's really wrong.

    If change is needed then we need to make it happen, don't just sit on your hands expecting a hand out, get up, get out and do what needs be done. If you don't know what or who ask, it's your country, it's your business and for Gods sake don't ever believe what the media says. They were bought off years ago and do what ever their puppet master tells them.

    I'm a Senior citizen disabled but I still am involved, crippled not by choice but still use my brain to activate those who would rather sit and watch TV all day long.

    Remember old school habits die hard and hard old people never give up, they stay true to their beliefs and the things that got us here in the first place. Greed, selflessness and disrespect has created todays dilemmas, we as a nation can and will turn it back around. LOL GBYA

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Sean Williams
TMFUltraLong

A Fool since 2010, and a graduate from UC San Diego with a B.A. in Economics, Sean specializes in the health care sector, but also has a penchant for mining, retail, and automotive stocks, as well as personal finance and macroeconomic topics of interest.

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