The Social Security program is complex. There are many different rules governing how benefits are calculated when retirees claim Social Security. There are also many different ways retirees can end up increasing or decreasing their benefits, depending on how old they are when they claim them.
Now consider all of the different rules regarding how Social Security is taxed, whether it's at the federal or the state level. For many retirees, paying federal taxes on Social Security is unavoidable.
But state taxes are, in many cases, avoidable depending on where you live. In fact, 38 states in the U.S. do not tax Social Security. Let's take a look.
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Assessing the states that tax
Before we get to the states that don't tax Social Security, let's take a peek at those that do -- just so you are aware and know a little bit more about what these policies look like. The 12 states that currently tax Social Security are:
- Colorado
- Connecticut
- Kansas
- Minnesota
- Missouri
- Montana
- Nebraska
- New Mexico
- Rhode Island
- Utah
- Vermont
- West Virginia
But just because these states tax Social Security, there are still many exemptions where residents can avoid paying state taxes.
For instance, in Kansas, retirees with an adjusted gross income (AGI) of $75,000 or less don't have to pay state taxes on their Social Security benefits. A person's AGI is their gross income including wages, dividends from investments, capital gains, business income, and retirement distributions minus any adjustments such as student loan interest payments, alimony, or retirement contributions. In West Virginia, individuals who make less than $50,000 (and less than $100,000 for married couples) also are exempt from state taxes on Social Security.
Additionally, many of these states above are contemplating or in the process of getting rid of state taxes on Social Security for most retirees. In Colorado, retirees who are age 65 and older no longer pay state taxes on Social Security, although retirees claiming benefits between the age of 62 and 65 may still need to pay state taxes. Nebraska is looking to move to a similar policy by 2025.
The 38 states that don't
There's no real rhyme or reason to which states don't tax Social Security. Several that don't, like Florida, don't have state taxes period, while others like Maine and California have high state taxes. The 38 states that don't tax Social Security 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
Factors to consider
Retirees spend decades paying Social Security taxes and contributing to the system so they can benefit when they retire, which is why you won't want to pay any more in taxes on your Social Security benefits than you absolutely have to. That's why understanding state tax laws as they pertain to Social Security is important.
But it's likely not the end of the world if you live in a state that does tax Social Security, or there are at least other factors to consider. For instance, New Jersey doesn't tax Social Security benefits but the state has the highest property taxes in the U.S.
Ultimately, where you live and retire should depend on many different factors, with state taxes being one of them. In general, it's great to learn as much as you can about Social Security rules and taxes or find a retirement planner who knows them well. This knowledge will help you get as much out of your benefits as possible.
