The vast majority of retired workers depend on Social Security benefits to some degree, according to Gallup. That makes it critical for those individuals to understand the financial implications of every decision, and one often overlooked variable is the extent to which each state taxes Social Security benefits.
Here's what retired workers should know.
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12 states tax Social Security benefits
Currently, 12 states in the U.S. tax Social Security benefits. A brief overview of the current tax rates and exemptions for each of those states is provided below.
Colorado: The state tax rate is 4.55%. Residents can deduct all federally taxed Social Security income when calculating their Colorado taxable income.
Connecticut: The state tax rate ranges from 3% to 6.99%. Benefits are not taxed if (1) single filers report an adjusted gross income (AGI) below $75,000 or (2) joint filers report an AGI below $100,000. Residents at or above those thresholds can still deduct 75% of federally taxable Social Security income when calculating Connecticut taxable income.
Kansas: The state tax rate ranges from 3.1% to 5.7%. Residents who report an AGI of $75,000 or less will not pay tax on benefits.
Minnesota: The state tax rate ranges from 5.35% to 9.85%. Joint filers can deduct $5,290 if provisional income (i.e., AGI plus nontaxable interest plus half of Social Security benefits) is below $80,270. Single filers can deduct $4,130 if provisional income is below $62,710. Those thresholds are adjusted annually for inflation.
Missouri: The state tax rate ranges from 1.5% to 5.4%. Residents do not pay tax on benefits if they are (1) single filers who report a Missouri AGI below $85,000 or (2) joint filers who report a Missouri AGI below $100,000.
Montana: The state tax rate ranges from 1% to 6.75%. Benefits are not taxed if (1) single filers report a Montana modified AGI below $25,000 or (2) joint filers report a Montana modified AGI below $32,000.
Nebraska: The state tax rate ranges from 2.46%. to 6.84%. Benefits are not taxed if (1) single filers report an AGI below $44,461 or (2) joint filers report an AGI below $59,961. That said, Nebraska recently passed legislation that will phase out taxes on Social Security benefits by 2025.
New Mexico: The state tax rate ranges from 1.7% to 5.9%. Benefits are not taxed if (1) single filers report an AGI below $100,000 or (2) joint filers report an AGI below $150,000.
Rhode Island: The state tax rate ranges from 3.75% to 5.99%. Residents of full retirement age do not pay tax on benefits if (1) single filers report an AGI below $88,950 or (2) joint filers report an AGI below $111,200. Those thresholds are adjusted annually to account for inflation.
Utah: The state tax rate is 4.95%. Benefits are not taxed if (1) single filers report a modified AGI below $30,001 or (2) joint filers report a modified AGI below $50,001.
Vermont: That state tax rate ranges from 3.35% to 8.75%. Benefits are not taxed if (1) single filers report an AGI below $50,001 or (2) joint filers report an AGI below $65,001.
West Virginia: The state tax rate ranges from 3% to 6.5%. Benefits are not taxed if (1) single filers report an AGI below $50,001 or (2) join filers report an AGI below $100,001.
Retired workers should also consider cost of living
There are 38 states that don't tax Social Security benefits, but they're not necessarily a better option. Retired workers should also consider the cost of living in each state. The Missouri Economic Research and Information Center (MERIC) is a great source of information.
On a quarterly basis, MERIC publishes a cost of living index that considers prices across six spending categories: grocery, housing, utilities, transportation, health, and miscellaneous. The baseline score is 100. Any state with a cost-of-living index below 100 is less expensive than average, and any state with a cost-of-living index above 100 is more expensive than average.
Here is how the states that tax Social Security benefits stack up:
- Colorado: 105.1
- Connecticut: 116.7
- Kansas: 86.4
- Minnesota: 96.8
- Missouri: 88.6
- Montana: 104.8
- Nebraska: 91.5
- New Mexico: 93.6
- Rhode Island: 113.8
- Utah: 102.4
- Vermont: 116.7
- West Virginia: 88.5
As indicated above, six states that tax Social Security benefits actually have a below average cost-of-living score, and three of them -- Kansas, Missouri, and West Virginia -- rank among the 10 least expensive states in the U.S.
Finally, retired workers should consider quality of life when deciding where to live. In fact, that's probably the most important piece of the puzzle. Living in close proximity to friends and family can make life more enjoyable, and happiness is priceless.
