Nearly 60 million Americans rely on Social Security retirement benefits, making it a hugely important part of the country's retirement system. On a federal level, Social Security benefits are taxable once your total combined income passes a fairly modest point, and most states exempt Social Security from their state income taxes.
Most, but not all. Retirees in 12 states currently risk losing some of their Social Security checks to state income taxes. Those states are Colorado, Connecticut, Kansas, Minnesota, Missouri, Montana, Nebraska, New Mexico, Rhode Island, Utah, Vermont, and West Virginia.
The good news is that even among those states, they often have rules that reduce their residents' tax burden on Social Security income vs. the standard income tax rates. The even better news is that two of those 12 states will soon drop their taxes on Social Security income altogether. Read on to find out which ones those are and the basics on how these states that do tax Social Security try to lighten the burden a bit.
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Colorado
Colorado offers retirees under age 65 a deduction of $20,000 on all retirement income. That deduction increases to $24,000 once you reach 65. The state also exempts all Social Security benefits from taxes if a taxpayer age 65 or older had at least $24,000 of their Social Security income subject to federal income taxes. In effect, that combination eliminates the state tax on Social Security benefits in Colorado for those age 65 and older.
Connecticut
Connecticut starts by following the federal exemptions on Social Security income, then adds a few more as well. Singles and those who are married and filing separately are exempt from taxes on Social Security income if their federal adjusted gross income is below $75,000. That limit rises to $100,000 for those who are married and file joint returns. Above that level, only 25% of residents' Social Security income is subject to state income taxes.
Kansas
Kansas exempts Social Security from state income taxes for those whose federal adjusted gross income is $75,000 or less.
Minnesota
Minnesota taxes Social Security benefits, but uses a "subtraction method" to reduce the amount of a household's Social Security subject to the state's tax, based on the household's adjusted gross income. For singles or heads of households, the first $78,000 is exempt, while for those who are married filing jointly, the first $100,000 is exempt. The exemption phases out by 10% for each $4,000 above those limits. For those who are married filing separately, the phaseout is 10% for each $2,000 above $50,000.
Missouri
Beginning in 2024, Missouri will no longer tax Social Security benefits. For 2023, single taxpayers with incomes below $85,000 and those who were married filing joint returns with incomes below $100,000 could deduct their otherwise taxable Social Security benefit from their state income taxes.
Montana
Through 2023, Montana residents need to fill out a state worksheet as part of their income tax forms to determine how much of their Social Security is taxable. Beginning in 2024, the general rule is that if your Social Security benefit is included in your federal adjusted gross income, it's taxable as state income to Montana.
Nebraska
Beginning in 2024, Nebraska will no longer tax Social Security benefits. For 2023, the state had already been in a phaseout situation, where 60% of taxpayers' Social Security benefits were exempt from taxes, with the target of having those taxes eliminated by 2025. In addition, those married taxpayers filing joint returns with incomes below $61,760 or taxpayers with other filing statuses with incomes below $45,790 already pay no Nebraska state income tax on their Social Security benefits.
New Mexico
New Mexico exempts Social Security benefits for people with low enough incomes, based on their tax filing status. For single taxpayers, the exemption is $100,000 in income, for those married filing jointly the exemption is $150,000 in income, and for those married filing separately, the exemption is $75,000.
In addition, New Mexico residents aged 100 or higher are completely exempt from state income taxes.
Rhode Island
If your income level is low enough and you've reached your full retirement age, Rhode Island won't tax your Social Security benefits. I've been unable to find the thresholds for 2023, but for 2022, the income limits for the exemptions were as follows:
- Single, married filing separately, or head of household: $95,800
- Married filing jointly or qualified widower: $119,750
Utah
Utah residents with low enough incomes will not have their Social Security benefits taxed by the state. The limits are determined by a taxpayer's filing status, with a phaseout by $0.025 per dollar that their income exceeds that threshold. The current limits are:
- Married filing jointly or head of household: $75,000
- Single: $45,000
- Married filing separately: $37,500
Vermont
Vermont exempts your Social Security from state income taxes if your income is low enough. For those who are married filing jointly or have civil unions and file jointly, the threshold is $65,000. For other tax filing statuses, it's $50,000. In all cases, there's a $10,000 phaseout range before Social Security benefits are otherwise fully taxed.
West Virginia
Single residents of West Virginia whose incomes are below $50,000 and those who are married filing jointly with incomes below $100,000 will not have their Social Security benefits taxed by the state of West Virginia. Benefits are taxable for those with incomes above that level, however. Note that several news sources seem to indicate that the state has completely eliminated its tax on Social Security benefits. This press release from the governor would disagree with that sentiment.
Taxes are important, but not the only thing you should consider
As you're preparing for or living through your retirement, the taxes you pay will certainly play a role in determining how far your money can stretch. While at least 10 of these 12 states will still tax some Social Security benefits in 2024, it's important to look beyond just the taxes to determine where you want to spend your golden years.
Look for a place that has the right balance of total costs of living, senior-friendly amenities, healthcare, safety, comfortable climate, and access to friends and family. When you put it all together along with the taxes you'll face, you can give yourself your best chance of an overall comfortable retirement.
