Social Security is a lifeline for many older Americans. The program is responsible for helping lift more than 15 million Americans over the age of 65 out of poverty each year, according to the Center on Budget and Policy Priorities. Even for those living above the poverty line, Social Security can play a crucial role in their budget and retirement planning.
As such, keeping as much of your Social Security check as possible is of great importance for many retirees. Unfortunately for those living in 10 states, there's a chance they'll see a reduction in their benefits. Depending on your income, the state government may impose income tax on a portion of your Social Security benefits.
Here's what you need to know.
How are Social Security benefits taxed?
The federal government uses a metric called "combined income" to determine what portion, if any, of your Social Security benefits are taxable at a federal level. Combined income is equal to the sum of your adjusted gross income, any non-taxable interest income, and half your Social Security income. Benefits are then subject to taxation based on the following table.
| Taxable Portion of benefits | Individual | 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% | $34,001 and up | $44,001 and up |
Data source: Social Security Administration.
You may notice those thresholds are exceptionally low. That's because the combined income thresholds were established over 30 years ago and haven't been adjusted for inflation since. That makes it harder and harder to avoid paying taxes on Social Security.
If you don't carefully plan your retirement account withdrawals and capital gains every year, you could end up with a massive tax bill on your Social Security income. But retirees in 10 states could have it even worse in 2024.
Image source: Getty Images.
Ten states that tax Social Security benefits for some residents
Every state has its own rules for how it taxes Social Security. For the 2024 tax year, 40 states don't tax Social Security at all, while 10 states have policies in place that tax Social Security for at least some residents, depending on income level. If you live in one of those states, you should do additional research or consult a tax professional to learn more about your specific situation.
Colorado: Taxpayers under the age of 65 with more than $20,000 in taxable benefits on their federal income tax return will owe state income taxes on the amount above that threshold. Retirees age 65 or older are exempt from taxes on Social Security benefits. The state tax rate is flat at 4.4%.
Connecticut: Any Social Security income included on your federal income tax return may be subject to taxes in Connecticut. However, the amount is limited to 50% of your benefits received regardless of what percentage is included on your federal return. The tax rate ranges from 2% to 4.5%.
Kansas: Taxpayers will owe state income taxes on any Social Security benefits also subject to federal income tax if their adjusted gross income exceeds $75,000. The top income tax rate is 5.7%.
Minnesota: Taxpayers can deduct up to $4,560 as an individual or $5,840 for a married couple filing jointly in Social Security benefits from their taxable income. That amount is reduced for residents with combined incomes above $69,250 for an individual or $88,630 for a married couple before phasing out completely at incomes of $78,000 or $100,000, respectively. The tax rate ranges from 6.8% to 9.85%.
Montana: Any Social Security income on your federal income tax return is subject to state income tax in Montana. The tax rate ranges from 4.7% to 5.9%.
New Mexico: Taxpayers with adjusted gross incomes exceeding $100,000 for individuals or $150,000 for married couples filing jointly will owe taxes on any Social Security income also taxed at a federal level. The tax rate ranges from 4.9% to 5.9%.
Rhode Island: Taxpayers below their full retirement age as defined by Social Security with an adjusted gross income above $101,000 for individuals or $126,250 for married couples filing jointly will owe taxes on any portion of Social Security income also included on their federal income tax return. The tax rate ranges from 4.75% to 5.99%.
Utah: Taxpayers with an adjusted gross income exceeding $45,000 for individuals or $75,000 for married couples filing jointly will owe taxes on any Social Security income included on their federal tax return. Those below the threshold qualify for a credit to offset the taxes. The tax rate is 4.65%.
Vermont: Taxpayers with an adjusted gross income above $50,000 for individuals or $65,000 for married couples filing jointly will owe income tax on at least a portion of any Social Security income included on their federal income tax return. The tax rate ranges from 3.35% to 8.75%.
West Virginia: Taxpayers with adjusted gross income above $50,000 for individuals or $100,000 for married couples filing jointly owe income tax on a portion of Social Security income included in their federal income tax return. The tax rate ranges from 5.1% to 5.525%.
Don't avoid these states just because of taxes
While the above 10 states might charge extra taxes on some of your Social Security income, that's not enough reason by itself to avoid them altogether.
For one, there's no telling how legislation will change in the future. States are eliminating taxes on Social Security every year. Several of the above states have proposed legislation to change their tax laws to be more favorable or eliminate taxes on Social Security.
Moreover, many of the above states offer different benefits for retirees like a low cost of living or appealing communities. Not every retirement decision has to be made with optimizing finances in mind.
That said, there are ways to reduce the burden of taxes in retirement without changing states. Using Roth accounts and carefully managing capital gains can help you avoid taxes and keep more of your retirement savings for yourself.
