You spend your career paying into Social Security coffers. So when you finally start collecting, you want to avoid paying unnecessary taxes on that hard-earned benefit.
Paying federal taxes is unavoidable for many Social Security recipients. Up to 50% of Social Security benefits are taxable for individuals with incomes between $25,000 and $34,000 or married couples filing joint returns with combined incomes between $32,000 and $44,000. For those with incomes above these thresholds, up to 85% of the benefit is taxable.
But paying state taxes on Social Security benefits is totally avoidable if you choose your retirement location wisely. In 38 states, your Social Security check isn't subject to state taxes.
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What states tax Social Security benefits?
If you live in the following 12 states, some or all of your Social Security benefits may be taxable. However, even in states that tax Social Security checks, many offer exemptions or tax credits for seniors with modest incomes.
- Colorado (Note: As of 2022, recipients age 65 and up won't pay state income tax on their Social Security benefits, but younger recipients may still owe state taxes.)
- Connecticut
- Kansas
- Minnesota
- Missouri
- Montana
- Nebraska. (Note: Nebraska is gradually phasing out state taxes on Social Security. Beginning in 2025, the state will no longer tax benefits.)
- New Mexico
- Rhode Island
- Utah
- Vermont
- West Virginia
The 38 states where benefits aren't taxable
In the other 38 states and the District of Columbia, you won't have to fork over any of your Social Security checks for state taxes. Those states are:
- 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
Of these states, nine -- Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming -- don't levy state income taxes, in general. That said, it's important to consider the overall tax picture in retirement, including property taxes and sales taxes.
Want to avoid retirement taxes? A Roth is your friend
If you're worried about federal or state taxes when you retire, consider investing in a Roth IRA or Roth 401(k). You won't get an upfront tax break on your contribution, but your money will grow tax-free. In addition, since you already paid taxes on the contributions, your withdrawals won't be taxed in retirement.
Even for Social Security purposes, distributions from Roth accounts don't count against you. For many aspiring retirees, paying taxes on retirement contributions now is well worth it, given the sweet tax breaks you'll get in your senior years.
