Most retirees know that Social Security benefits are adjusted annually to account for inflation. But they may not realize the income thresholds used to determine federal tax liability are not adjusted annually, nor have they ever been adjusted. As a result, the thresholds cover more Social Security benefits each year, increasing the tax burden on beneficiaries.
Some states also treat Social Security as taxable income. But they tend to tax benefits differently than the federal government, and the thresholds for deductions and exemptions vary between states.
Read on to learn which beneficiaries will owe taxes on Social Security in 2024.
How the federal government taxes Social Security benefits
Social Security is subject to federal income tax when annual combined income exceeds certain thresholds. "Combined income" for IRS purposes equals the sum of three different figures:
- One-half of Social Security benefits.
- Adjusted gross income (AGI).
- Nontaxable interest.
Single filers will owe taxes on their Social Security if their combined income is $25,000 or more. Married couples filing jointly will owe taxes on their Social Security if their combined income is $32,000 or more.
However, there are two different tax thresholds. People with combined income in the lower threshold will pay taxes on 50% of their benefit, and people with combined income in the upper threshold will pay taxes on 85% of their benefit. The following chart shows the combined income thresholds.
|
Taxable Portion of Benefits |
Combined Income (Single Filer) |
Combined Income (Joint Filer) |
|---|---|---|
|
50% |
$25,000 to $34,000 |
$32,000 to $44,000 |
|
85% |
More than $34,000 |
More than $44,000 |
Data source: The Social Security Administration.
Some people confuse the taxable portion of benefits with the tax bill. They are not the same. If 50% of benefits are taxable, that means 50% of Social Security counts toward taxable income. It doesn't mean 50% of benefits are paid in taxes. What a beneficiary actually pays depends on one's federal tax bracket and the associated tax rate.
How state governments tax Social Security benefits
Social Security is subject to state income taxes in certain situations. Specifically, 12 states taxed Social Security income in 2023, but only 10 states will tax Social Security income in 2024. Missouri and Nebraska are the two states that stopped taxing benefits this year.
States offer different deductions and exemptions, so there is no one-size-fits-all definition regarding how much Social Security income is taxable at the state level. Following are the 10 states that tax benefits this year.
Colorado: The tax rate is 4.4%. Taxpayers 65 and older can deduct all federally taxable Social Security income, while taxpayers 55 to 64 can deduct up to $20,000.
Connecticut: The 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. Those exceeding those thresholds will pay tax on no more than 25% of Social Security income.
Kansas: The 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 tax rate ranges from 5.35% to 9.85%. Benefits are exempt from taxation for (1) single filers with a federal AGI below $78,000 and (2) joint filers with a federal AGI below $100,000.
Montana: The tax rate ranges from 4.7% to 5.9%. Benefits are exempt from taxation for (1) single filers with a federal AGI above $25,000 and (2) joint filers with a federal AGI above $32,000.
New Mexico: The tax rate ranges 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 tax rate ranges 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 tax rate is 4.65%. Benefits are exempt from taxation for (1) single filers with a modified AGI (MAGI) below $45,000 and (2) joint filers with a MAGI below $75,000.
Vermont: The tax rate ranges 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 tax rate ranges 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. Some sources have incorrectly reported that West Virginia stopped taxing Social Security.
In closing, readers should remember that states that tax Social Security are not necessarily more expensive, and states that do not tax Social Security are not necessarily less expensive. Tax laws are only one factor in determining the total cost of living. Retirees should consider the big picture before making any big changes.
