Retirees in These 12 States Risk Losing Some of Their Social Security Checks

More than half of Americans mistakenly believe Social Security benefits are tax free, according to Nationwide Retirement Institute. But those monthly checks are in fact subject to taxation at the federal level, and in 12 states the state level as well. Given the important role Social Security plays in retirement, retired workers and future retirees should have a basic understanding of relevant tax laws.

Here are the important details.

Social Security benefits are taxable at the federal level

The Social Security program operated at a loss between 1975 and 1981, and the trust fund was facing depletion when Congress stepped in and approved sweeping changes in 1983. One of those changes allowed the federal government to tax benefits paid to individuals with income exceeding certain thresholds. A second set of income thresholds was added in 1993.

As detailed below, federal tax liability depends on the beneficiary's filing status and combined income, which is defined as adjust gross income (AGI) plus nontaxable interest plus one-half of Social Security benefits.

Data source: Social Security Administration.

Social Security benefits are also taxable in 12 states

Currently, 12 states tax Social Security income, but that figure will fall to 11 by 2025. Details are provided below. As a caveat, readers should be aware that state tax laws often change from one year to the next.

Colorado: The state tax rate is 4.4%, but taxpayers aged 65 and older can deduct all federally taxable Social Security income.

Connecticut: The state tax rate spans from 3% to 6.99%, but benefits are exempt from taxation for (1) single taxpayers with a federal AGI of less than $75,000, and (2) married taxpayers filing jointly with a federal AGI of less than $100,000.

Kansas: The state tax rate spans from 3.1% to 5.7%, but benefits are exempt from taxation for taxpayers with a federal AGI equal to or less than $75,000.

Minnesota: The state tax rate spans from 5.35% to 9.85%, but taxpayers with income below certain thresholds can deduct a portion of federally taxable benefits. The maximum deduction is $4,560 for single taxpayers, $5,840 for married taxpayers filing jointly, and $2,920 for married taxpayers filing separately.

Missouri: The state tax rate spans from 2% to 4.95%, but benefits are exempt from taxation for (1) single taxpayers with a federal AGI of less than $85,000 and (2) married taxpayers filing jointly with a federal AGI of less than $100,000.

Montana: The state tax rate currently spans from 1% to 6.75%, but the range will become 4.7% to 6.5% beginning in 2024. At that point, Montana will tax Social Security benefits to the same extent as the federal government.

Nebraska: The state tax rate spans from 2.46% to 6.64%, but benefits are exempt from taxation for (1) single taxpayers with a federal AGI equal to or less than $45,790, and (2) married taxpayers filing jointly with a federal AGI equal to or less than $61,760. Additionally, Nebraska will completely phase out the taxation of Social Security benefits by 2025.

New Mexico: The state tax rate spans from 1.7% to 5.9%, but benefits are exempt from taxation for (1) single taxpayers with a federal AGI equal to or less than $100,000, and (2) married taxpayers filing jointly with a federal AGI equal to or less than $150,000.

Rhode Island: The state tax rate spans from 3.75% to 5.99%, but benefits are exempt from taxation for (1) single taxpayers with a federal AGI equal to or less than $95,800, and (2) married taxpayers filing jointly with a federal AGI equal to or less than $119,750.

Utah: The state tax rate is 4.85%, but Utah offers a tax credit to (1) single taxpayers with a modified AGI equal to or less than $45,000, and (2) married taxpayers filing jointly with a modified AGI equal to or less than $75,000.

Vermont: The state tax rate spans from 3.35% to 8.75%, but benefits are exempt from taxation for (1) single taxpayers with a federal AGI equal to or less than $50,000, and (2) married taxpayers filing jointly with a federal AGI equal to or less than $65,000.

West Virginia: The state tax rate spans from 3% to 6.5%. Single tax payers can deduct benefits taxed by the federal government if their federal AGI is equal to or less than $50,000, and married taxpayers filing jointly can deduct benefits taxed by the federal government if their federal AGI is equal to or less than $100,000.

Retirees should keep tax laws in perspective

Retirees should be aware of state tax laws regarding Social Security, but it would be nonsensical to relocate simply to avoid taxation. Proximity to friends and family can have a material impact on quality of life, and leaving loved ones behind may not be worth a little extra money.

Retirees should also consider the total cost of living before relocating to a different state. For instance, California, Hawaii, and New York may not tax Social Security income, but the cost of living in those states is well above average. Likewise, Kansas, Missouri, and West Virginia may tax Social Security income, but the cost of living in those states is still well below average. In fact, six states that tax benefits have a below average cost living -- the other three are Minnesota, Nebraska, and New Mexico.