Social Security is an essential part of millions of Americans' retirement finances. After years of paying Social Security taxes, retirement is a time to reap the benefits with a consistent income source after you're done working. Unfortunately, the IRS doesn't go away in retirement.
Like other forms of income, the IRS and states have specific rules for Social Security benefits. The good news is that most states don't tax Social Security benefits. The less favorable news is that there are still 10 states where retirees could possibly face Social Security taxes.
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Which states could potentially tax Social Security benefits?
As of the start of 2024, here are the 10 states that may possibly tax Social Security:
- Colorado
- Connecticut
- Kansas
- Minnesota
- Montana
- New Mexico
- Rhode Island
- Utah
- Vermont
- West Virginia
If you live or plan to live in one of these states while receiving Social Security benefits, it's essential to check your state's specific rules because they vary widely and have their own guidelines and income thresholds.
For example, retirees in Connecticut can deduct 100% of their federally taxable Social Security income if their adjusted gross income (AGI) is below $75,000 for single filers and $100,000 for married couples filing jointly. However, Kansas taxes Social Security for anyone with an AGI of $75,000 or more, regardless of their filing status.
Planning to retire on a ranch in Montana? Your income thresholds will be the same as the federal thresholds for Social Security taxes.
Federal tax laws apply regardless of state rules
Like regular income tax rules, there are state rules as well as federal rules. Even if your state doesn't tax Social Security benefits, federal Social Security tax rules still apply. Instead of using your earnings as is, the IRS uses your combined income.
Your combined income is your AGI (paychecks, investment earnings, retirement account distributions, etc.) plus all nontaxable interest (like municipal bond interest) and half of your annual Social Security benefit.
For example, if your AGI is $60,000, and you receive $20,000 annually from Social Security and $1,000 from tax-exempt municipal bond interest, your combined income would be $71,000. Below are how much of your benefits are eligible for federal taxes based on your combined income and filing status:
| Percentage of Benefits Added to Taxable Income | Filing Single | Married, Filing Jointly |
|---|---|---|
|
0% |
Less than $25,000 |
Less than $32,000 |
|
Up to 50% |
$25,000 to $34,000 |
$32,000 to $44,000 |
|
Up to 85% |
More than $34,000 |
More than $44,000 |
Data source: Social Security Administration.
It's important to emphasize the "up to" part of the table because that is how much of your benefits are eligible to be taxed, but that doesn't necessarily mean they will be taxed that much. For instance, if you're only a single dollar over the thresholds above, only a fraction of a dollar of benefits will be included in your taxable income.
In addition, don't get confused: The percentages above aren't tax rates. Rather, they represent how much of your benefits get added to taxable income, which then get taxed at your regular income tax bracket. For example, if you're in the 22% tax bracket, you would owe 22% on the taxable portion of Social Security benefits.
Having a Roth account could help you lower or skip federal taxes
Roth accounts -- both IRAs and 401(k)s -- are accounts where you contribute after-tax dollars and then take tax-free withdrawals in retirement. Since money receive from a Roth account is tax-free, it's not calculated in your AGI. Because your combined income includes your AGI, it won't be counted toward that either.
Having access to money in a Roth account could lower your combined income because it reduces how much you may need to withdraw from sources like a 401(k) or traditional IRA, which count toward your AGI.
Both 401(k)s and traditional IRAs have required minimum distributions (RMDs), so you won't always be able to avoid withdrawals. Using a Roth account before RMDs kick in could help you delay facing federal taxes on your Social Security benefits.
