Countless Americans rely on Social Security to pay the bills in retirement -- perhaps a little too heavily. Though Social Security is only supposed to replace about 40% of the typical worker's previous earnings, an estimated 21% of married beneficiaries and 43% of single beneficiaries aged 65 and over depend on those benefits to provide 90% or more of their retirement income. Worse yet, some seniors don't get to keep those benefits in their entirety, because there are 13 states that tax Social Security income to varying degrees.
The list of states that tax Social Security reads as follows:
- New Mexico
- North Dakota
- Rhode Island
- West Virginia
If you live in one of these states, you should be prepared to part with a portion of your Social Security income, though certain exemptions might help lessen the blow.
Though Social Security payments are taxed in Colorado, recipients under 65 can exclude up to $20,000 of benefits, along with other retirement income. Meanwhile, seniors 65 and older can exclude benefits and other income totaling $24,000. Plus, Social Security income that isn't taxed by the federal government is not included in the adjusted gross income (AGI) calculation for state income tax purposes.
In Connecticut, Social Security is exempt from state taxes for single tax filers whose AGI is less than $50,000. Married couples filing jointly whose AGI is less than $60,000 get a similar break.
While wealthy beneficiaries living in Kansas might see their Social Security payments taxed, most recipients will get to keep all of their money. Kansas exempts Social Security benefits for those with an AGI of $75,000 or less.
You've got to be doing pretty well financially to get taxed on Social Security benefits in Missouri. Single tax filers with an AGI under $85,000, and joint filers with an AGI under $100,000, are exempt from taxes on benefits. Even those whose earnings exceed these limits might qualify for a partial exemption on their payments.
Montana's exemptions for Social Security taxes mimic those of the federal government. Single tax filers earning less than $25,000 a year and joint filers earning less than $32,000 can avoid taxes on their benefits.
Nebraska residents who aren't particularly high earners can avoid taxes on Social Security. Single beneficiaries with an AGI of $43,000 or less and married beneficiaries with an AGI of $58,000 or less won't have their Social Security income taxed.
New Mexico allows Social Security income to be factored into an overall retirement income exemption of up to $8,000 for individuals 65 and over. This exemption, however, is income-based. Single tax filers with an AGI under $28,500 and joint filers with an AGI under $51,000 can take the exemption.
Like Missouri, you need to be pretty well-off in Rhode Island to have your Social Security benefits taxed. Single tax filers with an AGI of $80,000 or less and joint filers with an AGI of $100,000 or less can avoid taxes on Social Security benefits.
In Utah, residents who are 65 and older can claim a retirement income tax credit of up to $450 per person, or $900 per couple, provided they don't earn too much. Those under 65 can claim a non-refundable tax credit of up to 6% of retirement income or $288 -- whichever is less. The credit is reduced by $0.025 for every dollar of modified AGI over $25,000 for single filers and $32,000 for joint filers.
States with no Social Security exemptions
Of the 13 states that tax Social Security benefits, only Minnesota, North Dakota, Vermont, and West Virginia offer no exemption whatsoever. If you retire in one of these states, prepare to have your benefits taxed to the fullest extent your local laws allow for.
As a retiree, you may be tempted to move someplace that doesn't tax Social Security benefits, but keep in mind that these taxes are only one piece of the puzzle. There are other factors, like housing and overall cost of living, that play an equally (if not more) important role in determining a state's retiree-friendliness, so be sure to look at the big picture when making your decision.