13 States That Tax Social Security Income

This article was updated on April 5, 2017, and originally published on August 16, 2014. 

Retiring isn't easy, so give yourself a big pat on the back if you've been able to kick your feet up and enjoy the fruits of decades of diligent saving and investing.

But just because you're retired, or approaching the age at which you can begin taking retirement benefits via Social Security (62 years old), that doesn't mean you'll necessarily be entitled to every penny you expect to get.

13 states that tax your Social Security income

The vast majority of U.S. states do not tax Social Security income, which is good news for retirees, especially since we're living longer as a nation and may need our nest eggs to last longer than originally anticipated. According to the Social Security Administration, the maximum benefit for a worker retiring at full retirement age is $2,687 in 2017. This maximum benefit is reviewed annually and is adjusted (usually higher) based on changes in the cost of living. 

Image source: Getty Images.

However, some retirees may not see their total benefits, as 13 U.S. states actually tax Social Security as ordinary income. Just for clarity's sake, keep in mind that these 13 states don't tax every penny of your Social Security income. Some states mirror the way Social Security is taxed on the federal level, while others have their own set of rules that they go by. But for current retirees and those who are nearing retirement age, it simply means that where you live can have a meaningful impact on how much you get out of Social Security.

The 13 states, as well as the top and bottom marginal tax rates that determine your level of taxation, are as follows:

Data source: Socialsecuritychoices.com. Colorado and Utah have a flat marginal tax rate. Table by author.

Of course, taxation of Social Security on a state level is not cut-and-dried.

In Minnesota, North Dakota, Vermont, and West Virginia, citizens are taxed on their Social Security income without exemption. However, in Utah, Connecticut, Colorado, Kansas, Missouri, Nebraska, New Mexico, Rhode Island, and Montana, some citizens are exempt from taxation on Social Security benefits. It often just depends on where their adjusted gross income lands on a state-by-state basis, except in New Mexico, where taxable benefits may qualify for an exemption based on income and age.  

Ways to beef up your Social Security benefits

Retirees and prospective retirees would certainly like to avoid taxation as much as possible and get the most out of their Social Security benefits. One obvious way to accomplish that is to consider retiring in one of the 37 states that do not tax Social Security benefits. Of course, you'll also want to consider other taxable implications, such as property and sales taxes that vary by state or even county. They can also have a meaningful impact on how far your dollar goes.

For younger workers, as well as those who are nearing retirement age or have already retired, maximizing Social Security benefits starts with making smart decisions.

Image source: Getty Images.

Younger adults should focus on working as many years as possible. Although workers only need to earn the equivalent of $5,200 annually over 10 years in order to qualify for Social Security benefits, the Social Security Administration will average a worker's 35 years of highest income to determine that individual's benefit level. In other words, someone who works less than 35 years will get a zero for each year up to 35 that he or she didn't work. It pays to work a full 35 years in order to get your maximum benefit.

For retirees or near-retirees, the prudent course of action might be to wait to take Social Security benefits.

Everyone's situation is unique, but waiting could be a smart move for those individuals who can comfortably rely on other forms of retirement income (e.g., 401(k) and IRA income) to cover their expenses through age 70. The longer you wait to take your distribution up to that age, the higher it will be. On average, an individual who waits until age 70 to take the distribution will receive a 76% higher monthly benefit compared to those who gave the green light at age 62. That's no pocket change.

Another option, for those who claimed Social Security benefits within the past 12 months (key phrase there), is to file form 521. Form 521 is essentially a Social Security "do-over." If a beneficiary regrets taking the distribution before age 70 and wants to wait longer to accrue a larger future benefit, that person can file form 521, pay back all Social Security disbursements received to that point, and start over as if nothing ever happened.