Another year is winding down, which means tax season is right around the corner. That time of year can be confusing for retired workers and other Social Security recipients. Benefits can be taxed at the federal and state levels, but different deductions and exemptions apply depending on the circumstances.
Read on to learn more about paying taxes on Social Security benefits.
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Social Security benefits can be taxed by the federal government
Social Security benefits are subject to federal income tax when combined income exceeds certain thresholds. Combined income is defined as the sum of adjusted gross income (AGI) plus nontaxable interest plus one-half of Social Security benefits.
The chart below details the taxable portion of Social Security benefits at different combined income thresholds for single filers and married couples filing jointly.
|
Taxable Portion of Benefits |
Combined Income (Single Filer) |
Combined Income (Joint Filer) |
|---|---|---|
|
50% |
$25,000 to $34,000 |
$32,000 to $44,000 |
|
85% |
$34,001 and above |
$44,001 and above |
Data source: The Social Security Administration.
The combined income thresholds have never been adjusted for inflation, but Social Security payouts have consistently increased over time due to annual cost-of-living adjustments (COLAs). As a result, the number of retirees that owe taxes on benefits has risen dramatically since the law first took effect in 1984, and that trend will continue in the current tax season given that benefits got a colossal 8.7% COLA in 2023.
Social Security benefits can be taxed by 12 states
Currently, Social Security payments are subject to state income tax in 12 different states. But that figure will fall to 10 next year because Missouri and Nebraska will stop taxing benefits, as detailed in the map below.
Chart by Author.
Some resources around the internet mistakenly report that West Virginia does not tax Social Security. That is incorrect. West Virginia (like several other states) has recently reduced the tax burden on some beneficiaries by expanding deductions, but those deductions only apply to individuals with federal AGIs below certain levels.
Detailed below is a brief overview of state-specific tax policies related to Social Security benefits in 2023, meaning they are relevant to returns that will be filed in 2024.
Colorado: The state tax rate is 4.4%. Taxpayers aged 65 and older can deduct all federally taxable Social Security income, while taxpayers aged 55 to 64 can deduct up to $20,000.
Connecticut: The state tax rate ranges from 3% to 6.99%. Benefits are exempt from taxation for (1) single filers with a federal AGI below $75,000 and (2) joint filers with a federal AGI below $100,000. Individuals exceeding those thresholds will pay tax on no more than 25% of their total Social Security income.
Kansas: The state tax rate ranges from 3.1% to 5.7%. Benefits are exempt from taxation for taxpayers with a federal AGI of $75,000 or less.
Minnesota: The state tax rate ranges from 5.35% to 9.85%. Taxpayers with combined income below certain thresholds can deduct a portion of federally taxable benefits from their state income. The maximum deduction is $4,560 for single filers and $5,840 for joint filers.
Missouri: The state tax rate ranges from zero to 4.95%. Benefits are exempt from taxation for (1) single filers with a federal AGI below $85,000 and (2) joint filers with a federal AGI below $100,000. Missouri will stop taxing benefits altogether in 2024.
Montana: The state tax rate currently ranges from 1% to 6.75%, but it will contract to 4.7% to 5.9% next year. Montana uses a state-specific formula to determine the taxable portion of benefits. The state actually taxes Social Security more aggressively than the federal government in some cases.
Nebraska: The state tax rate ranges from 2.46% to 6.64%. Benefits are exempt from taxation for (1) single filers with a federal AGI up to $45,790 and (2) joint filers with a federal AGI up to $61,760. Additionally, Nebraska now plans to phase out Social Security taxes in 2024, a year earlier than previously scheduled.
New Mexico: The state tax rate spans from 1.7% to 5.9%. Benefits are exempt from taxation for (1) single filers with a federal AGI below $100,000 and (2) joint filers with a federal AGI below $150,000.
Rhode Island: The state tax rate spans from 3.75% to 5.99%. Benefits are exempt from taxation for (1) single filers with a federal AGI below $95,800 and (2) joint filers with a federal AGI below $119,750.
Utah: The state tax rate is 4.65%. Benefits are exempt from taxation for (1) single filers with a modified AGI below $45,000 and (2) joint filers with a modified AGI below $75,000.
Vermont: The state tax rate spans from 3.35% to 8.75%. Benefits are exempt from taxation for (1) single filers with a federal AGI up to $50,000 and (2) joint filers with a federal AGI up to $65,000.
West Virginia: The state tax rate spans from 2.36% to 5.12%. Benefits are exempt from taxation for (1) single filers with a federal AGI up to $50,000 and (2) joint filers with a federal AGI up to $100,000. But contrary to what some sources report, benefits are indeed still taxed when those thresholds are exceeded.
Some states do not tax retirement income
The map in the previous section shows that 38 states (plus Washington D.C.) do not tax Social Security. But some of those states are even more tax friendly. Specifically, 13 states do not tax retirement income from Social Security, Individual Retirement Accounts (IRAs), or 401(k) plans.
