If you’re planning your retirement, understanding how state taxes and the cost of living impact your Social Security benefits is essential. In 2025, nine states continue to tax Social Security benefits, and the combined effect of taxes and living expenses could influence where you choose to retire. Here’s a closer look at these states and what retirees need to know.
1. Colorado
- Cost of Living: Colorado is known for its higher-than-average cost of living, especially in housing and transportation.
- Taxes on Social Security: Individuals earning over $75,000 and couples over $100,000 are subject to taxes on their Social Security benefits.
2. Connecticut
- Cost of Living: With high housing and healthcare costs, Connecticut is one of the more expensive states to live in.
- Taxes on Social Security: Residents with adjusted gross incomes (AGI) over $75,000 (individuals) or $100,000 (couples) must pay taxes on benefits.
3. Kansas
- Cost of Living: Kansas offers a lower cost of living than the national average, with affordable housing and utilities.
- Taxes on Social Security: Social Security benefits are taxed for residents with AGIs over $75,000.
4. Minnesota
- Cost of Living: Slightly above the national average, Minnesota’s costs are driven by healthcare and housing.
- Taxes on Social Security: Taxes apply depending on income thresholds and filing status.
5. Montana
- Cost of Living: Generally in line with the national average, but housing costs vary widely depending on location.
- Taxes on Social Security: Benefits are taxed for individuals with AGIs over $25,000 and couples over $32,000.
6. New Mexico
- Cost of Living: A more affordable state, New Mexico offers lower housing and utility costs.
- Taxes on Social Security: Benefits are taxed for individuals with incomes over $100,000 and couples over $150,000.
7. Rhode Island
- Cost of Living: Rhode Island has a high cost of living, particularly for housing and transportation.
- Taxes on Social Security: Taxes apply to individuals with AGIs over $86,350 and couples over $107,950.
8. Utah
- Cost of Living: Utah’s costs are slightly above average, driven by higher housing expenses.
- Taxes on Social Security: While Social Security is taxable, Utah offers a retirement-income tax credit to offset the burden.
9. Vermont
- Cost of Living: Known for its beautiful landscapes, Vermont also has higher costs, particularly in housing and healthcare.
- Taxes on Social Security: Benefits are taxed for individuals earning over $45,000 and couples over $60,000.
What Does This Mean for Retirees?
- Taxes Matter: If you live in one of these states and your income exceeds certain thresholds, part of your Social Security income could be taxed.
- Cost of Living Considerations: High living expenses in states like Connecticut and Vermont can reduce the overall value of your benefits, even before taxes.
- Plan Accordingly: A combination of state tax policies and cost of living can significantly impact how far your benefits will stretch in retirement.
How to Plan for Retirement in These States
- Assess Your Total Income: Include all sources of retirement income to determine how taxes might affect your finances.
- Research Local Costs: Housing, healthcare, and other expenses vary widely and should factor into your decision.
- Consult an Expert: A financial advisor or tax professional can help you evaluate how taxes and expenses align with your retirement goals.
For retirees considering a move or assessing their current state, understanding these factors is critical to maintaining financial security.
