For millions of retirees, Social Security is a lifeline, providing essential income during retirement. However, many don’t realize that where they live can impact how much they actually receive each month. While the federal government taxes Social Security benefits for certain income levels, some states impose their own additional taxes—taking an even bigger cut from retirees’ checks.
As of 2024, nine states tax Social Security benefits, meaning retirees living there might see smaller payouts than expected. Here’s a closer look at where retirees should be cautious:
- Colorado – If you’re under 65 and receive more than $20,000 in benefits, you’ll owe state income tax. Those over 65 are largely exempt.
- Connecticut – Social Security benefits are taxed if your income is over $75,000, with rates ranging from 2% to 4.5%.
- Kansas – If your adjusted gross income (AGI) exceeds $75,000, your Social Security benefits are taxed.
- Minnesota – Retirees can deduct up to $4,560 from taxable income, but those earning above $78,000 lose this advantage.
- Montana – The state taxes Social Security at rates between 4.7% and 5.9%.
- New Mexico – Retirees with an AGI of $100,000 or more will pay taxes on their benefits.
- Rhode Island – If you file for Social Security before your full retirement age, you may face state taxes.
- Utah – Residents with an AGI over $45,000 will see their benefits taxed.
- Vermont – Social Security benefits are taxed at rates ranging from 3.35% to 8.75%.
Good News for Some Retirees
Not all states are taxing Social Security so heavily. In recent years, Missouri, Nebraska, and Kansas have eliminated their state taxes on Social Security. Meanwhile, West Virginia plans to phase out Social Security taxation by 2026, offering relief for retirees there.
What About Federal Taxes?
Even if you live in a state that doesn’t tax Social Security, federal taxes can still apply. The IRS taxes benefits based on your “combined income,” which includes your AGI, non-taxable interest, and half of your Social Security benefits.
- If you’re single and your combined income is between $25,000 and $34,000, up to 50% of your benefits may be taxed. If your income is above $34,000, up to 85% of your benefits could be taxable.
- If you’re married and file jointly, the thresholds are $32,000 and $44,000 for 50% taxation, and above $44,000 for the 85% rate.
What Retirees Should Do
If you’re planning to retire soon or are considering a move, state taxes on Social Security should be a major factor in your decision. These taxes could take thousands of dollars from your retirement income over time.
A financial advisor can help you navigate these tax laws and find the best place to retire based on your financial situation. Staying informed and making smart choices about where you live can help ensure you get the most out of your Social Security benefits.
