There has been a clear trend toward states eliminating taxation of Social Security benefits. In fact, two states -- Missouri and Nebraska -- have officially eliminated Social Security taxes now that 2023 is behind us.
As we head into 2024, there are still 10 states that tax Social Security benefits to one extent or another. Here's a list of which states still have an income tax on Social Security benefits, what it could mean to your retirement income, and how to think about Social Security taxation in the context of the overall tax-friendliness of a state.
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10 states still tax Social Security benefits
I won't keep you in suspense. Now that two more states have eliminated taxes on Social Security benefits for 2024, here are the 10 states that still tax some Social Security income, listed in alphabetical order:
- Colorado
- Connecticut
- Kansas
- Minnesota
- Montana
- New Mexico
- Rhode Island
- Utah
- Vermont
- West Virginia
Most of these 10 states have their own unique Social Security tax rules
First, a quick refresher on how Social Security benefits are taxed by the federal government. The IRS uses a figure called your combined income to determine if your Social Security benefits are taxable or not. This consists of your adjusted gross income, any non-taxable interest income, and half of your Social Security benefits.
If your combined income is between $25,000 and $34,000 (single filers) or between $32,000 and $44,000 (joint filers), up to 50% of your Social Security income can be taxable. If your combined income exceeds $34,000 or $44,000 for single and joint tax filers, respectively, as much as 85% of your Social Security benefits can be taxable.
The key takeaway is that if Social Security makes up most of your income in retirement, you aren't likely to have to pay taxes on it. However, if you have substantial income in addition to Social Security, you'll likely have a combined income that makes a portion of your benefits taxable.
Most states that tax Social Security have their own tax structure, and the good news is that most have significantly higher income thresholds than the federal government. For example, Colorado taxes the same amount of Social Security benefits that the federal government does but only for taxpayers under age 65. Kansas only taxes Social Security for taxpayers with adjusted gross income above $75,000. But not all use their own limits; Montana is the only state that uses the exact same income thresholds as the IRS for all Social Security beneficiaries.
With that in mind, one important point is that all 10 of these states have different ways of taxing Social Security benefits. So, it's a smart idea to familiarize yourself with how your state will treat your Social Security benefits at tax time.
What makes a state tax-friendly to retirees?
As a final thought, while the taxation of Social Security benefits and other types of retirement income should be a consideration when deciding where to retire, how much to take out of your retirement accounts each year, and more, it's only one piece of the puzzle.
There are several other factors that could make your state tax-friendly to retirees even if it taxes Social Security income, and vice versa. For example, what is your state's sales tax rate? Montana generally has the highest taxation when it comes to Social Security benefits, but residents pay no sales tax.
Does your state charge annual property taxes on vehicles? And where does your state rank when it comes to property taxes on homeowners?
The point is that it can certainly be burdensome for retirees to live in a state where Social Security benefits can be taxed, but there's a lot of other taxes to consider as well.
