Where you live significantly influences your quality of life, especially if you rely on the fixed income provided by Social Security benefits. While the federal government taxes Social Security income for retirees who exceed a certain income level, most states do not independently tax these benefits. However, this is not the case nationwide, as 12 states do tax Social Security recipients.
For retirees on limited incomes, every cent counts. Losing some of this already modest paycheck to additional taxes can be a burden that many may not be willing to bear. Yet, this “extra” tax shouldn’t be the sole factor in deciding whether to move to or leave these 12 states.
Taxable Income
The federal government uses a metric called “combined income” to determine if your Social Security benefits are taxable. Combined income includes your adjusted gross income, any untaxed interest income, and half of your Social Security benefits. If this number exceeds certain thresholds, the excess is taxed.
While everyone is subject to this federal measure regardless of residence, state taxes vary widely and can have a more immediate impact on your take-home benefits.
12 States
Navigating state-specific tax regulations is crucial for retirees. Here’s a rundown of the tax rules in the 12 states that tax Social Security benefits. Keep in mind, taxes shouldn’t be the only factor when deciding where to retire. Quality of life, proximity to family, healthcare access, and overall cost of living are equally important.
Colorado
Colorado taxes Social Security benefits for individuals under 65 who have more than $20,000 in taxable benefits on their federal income tax return, with a tax rate of 4.4%. After turning 65, Social Security benefits are state tax-free.
Connecticut
In Connecticut, single filers with income over $75,000 and joint filers with income over $100,000 will see a state tax on up to 25% of their Social Security income, with rates ranging from 5.5% to 6.99%.
Kansas
Kansas taxes Social Security income for individuals with an adjusted gross income over $75,000. The tax rate is 5.7%, mirroring the standard state income tax rate.
Minnesota
In Minnesota, single filers with an adjusted gross income over $78,000 and joint filers over $100,000 will have a portion of their Social Security income taxed. The tax rate ranges from 6.8% to 9.85%, depending on income.
Missouri
Missouri taxes Social Security benefits for individuals with an adjusted gross income over $85,000 and joint filers over $100,000 at a rate of 5.4%. This will change after 2024, when the state plans to eliminate these taxes.
Montana
Montana taxes up to 85% of Social Security benefits for individuals with an adjusted gross income over $25,000 and joint filers over $32,000. The tax rate is 6.75%.
Nebraska
Nebraska taxes Social Security benefits at rates between 3.51% and 6.84% for amounts taxable at the federal level. This may change by 2025 as the state is considering eliminating these taxes.
New Mexico
In New Mexico, individuals with an adjusted gross income over $100,000 and joint filers over $150,000 will have their Social Security benefits taxed at rates ranging from 4.9% to 5.9%.
Rhode Island
Rhode Island taxes Social Security benefits for single filers with an adjusted gross income over $95,800 and joint filers over $119,750, with tax rates between 4.75% and 5.99%.
Utah
Utah taxes Social Security benefits for single filers with an adjusted gross income over $45,000 and joint filers over $75,000 at a rate of 4.65%.
Vermont
Vermont taxes Social Security benefits for single filers with an adjusted gross income over $50,000 and joint filers over $65,000. The tax rate ranges from 3.35% to 8.7%.
West Virginia
West Virginia taxes Social Security benefits for single filers with an adjusted gross income over $50,000 and joint filers over $100,000 at a rate of 5.12%.
FAQs
Do all states tax Social Security benefits?
No, only 12 states tax Social Security benefits.
How is federal Social Security taxable income calculated?
It’s based on your combined income, including adjusted gross income, untaxed interest, and half of your Social Security benefits.
Are there states planning to change their Social Security tax rules?
Yes, states like Missouri and Nebraska are considering changes to eliminate these taxes soon.
Why shouldn’t taxes be the only factor in choosing where to retire?
Other factors like quality of life, family proximity, healthcare, and cost of living are equally important.
Can a financial planner help with state tax planning for retirees?
Yes, a good financial planner can provide valuable advice on managing taxes in retirement.
