Are you living in one of them? If so, here’s what to do about it.
Many retirees are heavily reliant on Social Security to fund their retirement. Nearly six in 10 say it’s a major source of income, according to a Gallup poll from April. So losing some of that Social Security check could put a major dent in retirement plans for many Americans.
12 states currently tax Social Security benefits for at least some residents, depending on income level. That means some retirees living in those states could lose some of their monthly benefits as a result. But that doesn’t mean you should avoid retiring in those 12 states.
Here’s what you need to know.
How are Social Security benefits taxed?
Social Security benefits are subject to federal income tax in cases where combined income exceeds certain thresholds. Combined income is the sum of your adjusted gross income, non-taxable interest, and half your Social Security benefits. Benefits are then subject to taxation based on the following table.
| TAXABLE PORTION OF BENEFITS | SINGLE FILER COMBINED INCOME | JOINT FILER COMBINED INCOME |
|---|---|---|
| Up to 50% | $25,000 to $34,000 | $32,000 to $44,000 |
| Up to 85% | $34,001 and up | $44,001 and up |
SOURCE: SOCIAL SECURITY ADMINISTRATION.
There’s no escaping this tax, no matter what state you live in.
If you don’t plan your retirement account withdrawals and capital gains carefully, you could end up with a massive federal tax liability when combined with Social Security taxation. But retirees in 12 states could have it even worse.
12 states that tax Social Security benefits for some residents
It’s important to note that each state has its own rules and tax rates for Social Security. 38 states don’t tax Social Security at all. 12 states have some policies in place that tax Social Security benefits for at least some residents, depending on income level. Readers should do additional research or consult a tax professional to learn more about their specific situation.
Colorado: Some taxpayers will owe 4.4% on some of their Social Security benefits. However, that’s limited to retirees under the age of 65 with more than $20,000 in taxable benefits on their federal income tax return. Only the amount above that threshold is taxed. Retirees 65 and older are able to avoid state taxes on their Social Security benefits.
Connecticut: Taxpayers with adjusted gross incomes above $75,000 for single filers or $100,000 for joint filers will owe income tax between 5.5% and 6.99% on up to 25% of their Social Security benefits.
Kansas: Taxpayers with an adjusted gross income above $75,000 will owe a 5.7% tax on their federally taxable Social Security benefits.
Minnesota: Taxpayers can deduct up to $5,840 in Social Security benefits from their taxable income. Those with combined income exceeding a certain threshold will see a reduced deduction. Taxpayers owe between 6.8% and 9.85% on their taxable benefits.
Missouri: Taxpayers with an adjusted gross income exceeding $85,000 for single filers or $100,000 for joint filers will owe a tax of 5.4% on any portion of Social Security income exceeding those thresholds. Missouri will stop taxing Social Security in 2024.
Montana: Taxpayers with an adjusted gross income exceeding $25,000 for single filers and $32,000 for joint filers will owe a 6.75% tax on up to 85% of their Social Security income.
Nebraska: Any Social Security income that’s taxable at the federal level is also considered taxable income in Nebraska. Most taxpayers owing tax on Social Security will owe between 3.51% and 6.84% on the taxable portion of their benefits. The state is phasing out Social Security taxation by 2025.
New Mexico: Taxpayers with adjusted gross incomes exceeding $100,000 for single filers or $150,000 for joint filers will owe taxes of between 4.9% and 5.9% on their Social Security benefits.
Rhode Island: Taxpayers with an adjusted gross income exceeding $95,800 for single filers or $119,750 for joint filers will owe a tax between 4.75% and 5.99% on their Social Security benefits subject to federal income tax.
Utah: Taxpayers with an adjusted gross income exceeding $45,000 for single filers or $75,000 for joint filers will pay a 4.65% tax on their Social Security benefits.
Vermont: Taxpayers with adjusted gross incomes exceeding $50,000 for single filers or $65,000 for joint filers will owe a tax between 3.35% and 8.7% on at least a portion of their Social Security benefits.
West Virginia: Taxpayers with adjusted gross incomes exceeding $50,000 for single filers or $100,000 for joint filers will owe a tax of 5.12% on their federally taxable Social Security income.
Don’t avoid these states
Some of these states offer a lot to retirees, and you shouldn’t avoid retiring to one of them just because they tax Social Security benefits. While it’d be nice to keep a larger portion of your Social Security check, you may be able to offset the effect with a lower cost of living or a higher quality of life. Remember, your retirement decisions don’t all have to optimize for your finances.
That said, there are ways to minimize your taxes in retirement. Using Roth accounts and managing capital gains with offsetting losses can help you avoid taxes and keep more of your retirement savings for yourself.