38 States That Don't Tax Social Security Benefits

Social Security is not likely to deliver the kind of income to you that you might have hoped for. Recently, in fact, the average monthly retirement benefit was $1,665 -- which comes to about $20,000 a year.

That news is bad enough, but here's some worse news: a bunch of states subject some or all of residents' Social Security income to taxation. Fortunately, most states don't. Here's a look at which states do and don't tax Social Security -- plus some reassurance even if your state does tax it.

Image source: Getty Images.

Where Social Security is taxed

Let's start with the bad news first. Here are the 12 states that tax Social Security benefits:

• Colorado
• Connecticut
• Kansas
• Minnesota
• Missouri
• Montana
• Nebraska
• New Mexico
• Rhode Island
• Utah
• Vermont
• West Virginia

The 38 states that don't tax your Social Security benefits

You can now use the process of elimination to see which states do not tax Social Security, but here's a handy list, to save you the trouble:

• Alabama
• Alaska
• Arizona
• Arkansas
• California
• Delaware
• Florida
• Georgia
• Hawaii
• Idaho
• Illinois
• Indiana
• Iowa
• Kentucky
• Louisiana
• Maine
• Maryland
• Massachusetts
• Michigan
• Mississippi
• Nevada
• New Hampshire
• New Jersey
• New York
• North Carolina
• North Dakota
• Ohio
• Oklahoma
• Oregon
• Pennsylvania
• South Carolina
• South Dakota
• Tennessee
• Texas
• Virginia
• Washington
• Wisconsin
• Wyoming

You can add Washington, D.C., to that list, as well.

Go ahead and breathe a sigh of relief if you live in one of the states above (or Washington, D.C.) -- but remember to keep the big picture in mind. Many states may not tax your retirement benefits or any earned income -- but they still need revenue to keep the lights on. So in general, while one state may not tax income, it will likely make up for that via other taxes, such as on property and/or sales. If you're ever going to compare or make decisions based on any region's tax rate, be sure to take all taxes into account.

Good news -- even if you live in one of the 12 states

Meanwhile, if you do live in one of the 12 states that tax Social Security, you may still be in the clear, or may face a fairly small tax bite. Most of the 12 states don't tax benefits heavily, and they all differ in how they approach taxing Social Security. To find out what the tax details are where you live, look up the information for your state.

As an example, here's what the state of Kansas says about the matter: "If your federal adjusted gross income is $75,000 or less, regardless of your filing status, your social security benefits are exempt from Kansas income tax. The exemption for social security benefits applies only to the extent the benefits are included in your federal adjusted gross income."

If you do get hit with a tax, it's most likely going to be a single-digit tax rate, and very possibly a low-single-digit tax rate.

Federal taxation

While you might escape state taxation of your Social Security benefits, you might not escape federal taxation. Uncle Sam does tax some retirement income, including Social Security.

Up to 85% of your benefits, in fact, can be taxed. The table below shows the taxation thresholds. Note that your "combined income" is your adjusted gross income (AGI) plus non-taxable interest, plus half of your Social Security benefits:

Data source: Social Security Administration. 

If you find yourself about to hyperventilate, thinking that you'll have to fork over 50% or 85% of your benefits, calm down. It's up to 50% or 85% of your benefits that may face a tax hit, meaning between 15% and 50% isn't touched. And on the portion that is subject to taxation, your rate might be, for example, 12% or 22%.

So don't worry too much about your Social Security benefits getting taxed. But do spend a little time learning more about Social Security. The more you know, the more you may be able to wring out of the program, and that can make your retirement more secure.

Editor's note: A previous version of this article failed to acknowledge the recent enactment of legislation in North Dakota making Social Security no longer taxable at the state level. The author and the Fool regret the error.