Yeah, you’ve paid your taxes right on time, and without tax avoidance, not even once. Now, you’re about to retire, and you’re sure your Social Security retirement money is gonna be totally tax-free. Well, I have some bittersweet news: some U.S. states do apply taxes to retirement payments. In the United States, the tax treatment of Social Security retirements varies significantly from state to state.
With a total of thirty-seven states and the District of Columbia exempt from income tax or not including Social Security benefits in the calculation of taxable income, it is imperative to understand the complexity of this issue for retirees. Such a bummer, right? Well, luckily for you, just 13 states do have taxes for Social Security payments, and we’ve put together those territories, so you can plan in advance (as many years before as you think it’s necessary).
U.S. States That Apply Taxes on Social Security Payments
In New Mexico, all Social Security benefits are taxable, but the state offers a deduction that reduces the taxation of all retirement income. This approach highlights the importance of analyzing not only the tax rate, but also the compensatory measures that could alleviate the tax burden for retirees.
Utah, on the other hand, taxes Social Security benefits, but uses tax credits to eliminate liability for beneficiaries with incomes less than $30,000 (single filers) or $50,000 (joint filers). Credits are gradually reduced to 2.5 cents for every dollar above these thresholds. This approach provides significant tax relief for those with lower incomes, underscoring the importance of considering state-specific provisions.
Several states also adjust the taxation of Social Security benefits based on factors such as age or income level:
- Colorado allows taxpayers to subtract part of their Social Security income (as well as pension income) as long as they are 55 or older, under the “pension and annuity subtraction”.
- Connecticut excludes Social Security benefits from the income calculation for any taxpayer with less than $75,000 (single filers) or $100,000 (joint filers) in adjusted gross income (AGI).
- Kansas provides an exemption for such benefits for any taxpayer whose AGI is $75,000, regardless of filing status.
- Minnesota offers a graduated system of Social Security subtractions that are triggered if someone’s provisional income is below $81,180 (single filer) or $103,930 (joint filer).
- Missouri allows a 100 percent exemption from Social Security benefits as long as the taxpayer is age 62 or older and has less than $85,000 (single filer) or $100,000 (joint filer) of annual income.
- Nebraska allows single filers with $43,000 in AGI or less ($58,000 for joint filers) to subtract their Social Security income. If your income exceeds that threshold, the state follows the federal treatment.
- North Dakota allows taxpayers to subtract taxable Social Security benefits if their AGI is less than $50,000 (single filer) or $100,000 (joint filer).
- Rhode Island allows a modification for taxpayers who have reached full retirement age according to the Social Security Administration and have a federal AGI less than $81,900 (single filer) or $102,400 (joint filer).
- Vermont offers a graduated system of Social Security exemptions that are activated if a taxpayer’s income is less than $34,000 (single filer) or $44,000 (joint filer).
Although Montana and West Virginia have no age or income stipulations, their approaches to taxation on these benefits still deserve attention.
- In Montana, which has no age or income stipulations, some Social Security benefits may be taxable. The state advises taxpayers to complete a spreadsheet to determine how the state taxable amount differs from the federal taxable amount.
- West Virginia enacted a law in 2019 to begin phasing out Social Security taxes for those with incomes not exceeding $50,000 (single filers) or $100,000 (joint filers). Starting in fiscal year 2020, the state waived 35 percent of benefits for qualifying taxpayers. Starting from 2021, that amount increased to 65 percent, and in 2022, the benefits will be completely exempt for those taxpayers.