Social Security benefits are used by most people to supplement their savings and make sure they have enough money to retire, and still cover their daily expenses and cost of living. Some retirees end up relying on Social Security for the majority of their income.
With benefits such a key part of a retiree's income, it's important to understand how these benefits are taxed so there are no surprises and so you can take steps that will help you hold on to as much of your benefits as possible.
Interestingly, how Social Security gets taxed on the state level can work very differently from state to state because some states still tax Social Security and others don't. Let's take a look at the 38 states that don't tax Social Security.
But first...
Before we jump into the states that don't tax Social Security, I thought it would first be helpful to provide a refresher on how Social Security gets taxed on the federal level and what states do tax Social Security.
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Everyone will pay federal taxes on their Social Security benefits if their combined income breaches certain thresholds. Combined income is your adjusted gross income plus nontaxable interest from investments such as municipal bonds, plus one-half of your Social Security benefits.
If your combined income as an individual is between $25,000 and $34,000, then up to half of your Social Security benefits may be taxed. If your combined income is above $34,000, as much as 85% of your benefits could be taxed. For married couples, up to half of your Social Security benefits will be taxed if your combined income exceeds $32,000; the second threshold for the 85% taxation rate is $44,000.
Everyone is subject to these federal tax rules, but there are also 12 states across the U.S. that tax Social Security benefits as well in at least some cases. Those 12 states are:
- Colorado
- Connecticut
- Kansas
- Minnesota
- Missouri
- Montana
- Nebraska
- New Mexico
- Rhode Island
- Utah
- Vermont
- West Virginia
Keep in mind that these states tax Social Security differently, and a lot of them may exempt Social Security from being taxed based on a retiree's total income or tax filing status, among other exemptions.
For instance, Colorado allows retirees who are age 65 or over to deduct their entire Social Security benefits from their state income, which essentially means their benefits aren't taxed. But those claiming Social Security who are under the age of 65 may still have to pay Colorado state taxes.
The 38 states that don't tax Social Security
The good news is that the majority of states do not tax Social Security. This list also includes states with some of the largest populations in the U.S., so may the odds be ever in your favor:
- 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
Social Security is important, but not everything
While it's important to know how your state taxes Social Security, or any retirement benefit for that matter, you probably should not pick a state to live in solely based on how it taxes Social Security benefits.
Yes, I certainly think it merits consideration, but so do other things like the cost of living in those states and other taxes that may impact you such as property taxes or other taxable retirement benefits. Still, knowing as many tax rules as possible will help you improve your financial health for the long haul.
