For many older Americans, Social Security payments are a crucial source of income. The federal government can, however, tax Social Security benefits just like it can any other income; the amount depends on the retiree’s income. In most areas of the United States, this is all that Social Security claimants will typically be required to pay.
This isn’t always the case, though. While the majority of states don’t impose Social Security taxes, 11 do.
What you should be aware of is as follows:
- Even though retirees don’t have to pay taxes on their Social Security payments, they still can’t make more than the minimum required income.
- The only states that impose a separate Social Security tax using the same income levels as the federal government are Minnesota and Utah.
- The states that don’t impose a Social Security tax aren’t necessarily better for seniors to live in. The expense of living, crime rates, climate, and distance from friends and family are further considerations.
Social Security is taxed in these states
Eleven states tax all or a portion of the Social Security income received by their citizens. These are West Virginia, Connecticut, Kansas, Minnesota, Missouri, Montana, Nebraska, New Mexico, Rhode Island, Utah, and Vermont. Colorado, which once taxed Social Security income, will stop doing so in 2022.
Recognizing Social Security Benefits Taxes
The federal government has been able to tax Social Security benefits since 1983.
A person’s combined income (defined as the sum of their adjusted gross income (AGI), nontaxable interest, and half of their Social Security payments) and filing status will determine how much of their benefits are taxed. 85% of the total benefit will not be taxed, regardless of the outcome of the Internal Revenue Service (IRS) computation.
Taxes on federal income may also apply to income from other retirement plans. Pension payments, for instance, can be either totally or partially taxable, depending on how much after-tax money was deposited into the contract by the recipient (or their employer).
The basic principles for spousal Social Security benefits and Social Security disability benefits are the same as those for the main Social Security program in that they depend on the retiree’s overall income to determine the amount due to federal income taxes (up to 85%).
But, additional security income is not subject to taxation.
Technically, there isn’t a location in the United States where Social Security income won’t be subject to any taxes at all. The only option to avoid paying any taxes on Social Security income is to live on a very tight budget in retirement or to stay below the minimum income threshold (e.g., by using tax-free Roth account withdrawals, qualifying longevity annuity contracts (QLACs), etc.). So, the majority of individuals will probably need to pay taxes on their Social Security payments, and pensioners in a dozen states will also need to pay an extra state tax on these benefits.
State-by-State Social Security Benefit Taxes
A total of 39 states and the District of Columbia in the United States do not impose a tax on Social Security benefits.
Nine of these states do not collect state income tax, even on Social Security income: Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming.
Even though New Hampshire is one of nine states without an income tax, dividend and interest income are still taxed there.
The 11 states that tax Social Security benefits in addition to federal taxes are listed here, along with information on their individual tax laws.
- Connecticut: The state of Connecticut levies a 3%–6.99% Social Security income tax. Depending on their AGI and how they file their taxes, retirees can write off most or all of their benefit income. Beneficiaries will not be required to pay state taxes on their benefits if their AGI is less than $100,000 (married filing jointly) or $75,000. (married filing jointly). 75% of Social Security benefit payments are remain tax-free when they are made over these limits.
- Kansas: The state of Kansas taxes Social Security payments at the same rate as other types of income, which ranges from 3.1% to 5.7%. But, regardless of their filing status, retirees with an AGI of up to $75,000 are free from paying state taxes on their Social Security income.
- Minnesota: For assessing how much of a retiree’s Social Security payments should be taxed, Minnesota applies the same standards as the federal government. Moreover, Minnesota’s Social Security Subtraction allows beneficiaries who do owe taxes on their payments to obtain a partial deduction. Couples filing jointly in 2021 can exclude up to $5,290 from their Minnesota income, while single filers can exclude up to $4,130 from their federally taxable benefits. Higher-income residents are not permitted to use this. Couples filing jointly and single-filers with AGIs of at least $62,710 and $80,270, respectively, are only eligible for a partial exemption; those with AGIs of at least $83,360 and $106,720, respectively, are ineligible. 16 The Social Security income tax rate in Minnesota ranges from 5.35% to 9.85%.
- Missouri: The Social Security income tax rate in Missouri ranges from 0% to 5.4%, although it can possibly be higher. Age 62 and older single filers and married couples filing jointly with AGIs under $85,000 and $100,000, respectively, are eligible to deduct all of their Social Security benefits in full. Higher earners can still be eligible for a partial deduction. 19
- Montana: During the 2021 tax year, the Social Security income tax rate in Montana varies from 1% to 6.9%, with the maximum marginal tax rate decreasing to 6.75% beginning in 2022. Retirees with an AGI of under $25,000 (single filer) or $32,000 (married filing jointly) will not be taxed on their Social Security payments, just like they are not taxed on their federal income. For inhabitants in higher income levels, this is not the case. In contrast to the federal government, Montana utilizes a different approach to determine what someone owes (the state tax form provides a worksheet).
- Nebraska: The Social Security income tax rate in Nebraska ranges from 2.46% to 6.84%. 22 If an individual or a married couple filing jointly has an AGI under $44,460 or $59,960, respectively, they are free from paying Social Security taxes on their payments. A new state statute that took effect in the 2021 tax year also gradually eliminates taxation of payments in Nebraska, with beneficiaries receiving a 5% reduction in their Social Security taxes. By 2025, the decrease will increase gradually to 50%, at which time state legislators will decide whether to completely repeal the benefits tax by 2030. 2324
- New Mexico: The state of New Mexico levies a 1.7% to 5.9% tax on Social Security income. Similar to Montana, New Mexico applies the same income levels as the federal government to exclude citizens with lesser incomes. Benefits from Social Security are treated as regular kinds of income for higher income tax levels. However, those who are filing separately or jointly and are 65 years of age or older and have an AGI of up to $28,500 or$51,000, respectively, are allowed to deduct up to $8,000 in income, which includes Social Security benefits.
- Rhode Island: The state of Rhode Island levies a 3.75% to 5.99% tax on Social Security income. Nevertheless, if a retiree is 66 or older and has an AGI of less than $86,350 (for single filers) or $107,950 (for joint filers), the state will not tax their benefits (married filing jointly).
- Utah: Using the same calculation as the federal government to determine how much of a retiree’s Social Security payments should be taxed, Utah follows Minnesota as the only other state with a tax rate of 4.95%. But starting in 2021, Utah will grant taxable benefits a partial or full credit. AGIs of less than $30,000 for single filers and $50,000 for married couples filing jointly are required to be eligible for the full tax credit on benefit income. Higher income earners are still eligible for a portion of the tax cut, but the credit is reduced by 2.5 cents for every dollar beyond the previously indicated income limitations.
- Vermont: Single filers in Vermont who have an AGI of up to $45,000 are eligible for a complete exemption from state taxes on their Social Security benefits, while those who have an AGI of $45,001 to $54,999 are still eligible for a partial exemption. The entire exemption is available to married couples who file jointly up to a combined AGI of $60,000. At that point, the exemption begins to taper down. Benefits are completely taxed at the state rate of 3.35% to 8.75% for single filers and couples filing jointly earning at least $55,000 and $70,000, respectively.
- West Virginia: The state of West Virginia levies a 3% to 6.5% tax on Social Security income. Yet for those with lesser incomes, West Virginia is gradually eliminating state income taxes on Social Security payments. Individuals and couples filing jointly who make up to $50,000 and $100,000 in income each for the 2021 tax year may deduct 65% of their Social Security payments from their state income. In 2022, this increased to 100%. Retirement benefits will still be taxed under the federal model for retirees whose AGI is over those limits.
Are Social Security benefit-taxing states worse for retirees?
When Social Security benefits are counted as taxable income, the cost of living in a state does not go up. The Missouri Economic Research and Information Center says that as of the third quarter (Q3) of 2021, four of the states that tax Social Security benefits had very high cost-of-living index scores, while the other eight were in the two lowest-scoring groups. Namely, Kansas came in second-lowest in the United States, after Mississippi.
Inversely, states without a Social Security tax aren’t necessarily more tax-friendly locations to reside. When a state government doesn’t get revenue from one source that might be taxed, it usually makes up the difference through other types of taxes.
For instance, Texas relies heavily on taxes from a variety of sources, including insurance taxes, sin taxes on alcoholic beverages, tobacco products, coin-operated machines (i.e., slot machines), and motor fuel taxes, despite not having any state income taxes whatsoever (thereby precluding the imposition of a Social Security income tax).
Some states, like Arkansas, California, Louisiana, and New York, which do not get funding from Social Security benefits, have some of the highest income tax or sales tax rates in the nation.
The capacity of the local government to invest in social services that you or your loved ones may need, such as healthcare, infrastructure, and public transit, may be hampered by living in a state where taxes are lower.
While choosing a state for retirement, you should also take the following into account:
Although the cost of living is a significant factor, the total score doesn’t provide the best indication of which states are the cheapest. For instance, while New Jersey, the 40th most expensive state overall, has housing costs that are noticeably higher than those in Connecticut, the most costly state with a Social Security tax and the one with the 43rd highest cost of living score in the nation.
For someone in a different financial situation, a residence that might be affordable for one individual might not be for another. Climate, crime rates, and distance from friends and family are further essential considerations.
Which states exclude Social Security benefits from taxation?
Just 11 states, including Connecticut, Kansas, Minnesota, Missouri, Montana, Nebraska, New Mexico, Rhode Island, Utah, Vermont, and West Virginia, impose taxes on Social Security income out of the 50 states and the District of Columbia.
Which state offers the lowest taxes to retirees?
Delaware is a strong candidate for the best state for retirees when it comes to taxes, despite the fact that there is no objective metric for tax friendliness. The First State does not impose any estate, municipal, or state sales taxes. One of the lowest median property tax rates in the nation is found in Delaware. While being higher than the rates levied by 16 other states and the District of Columbia, its income tax rate of 6.6% is nevertheless lower than that of those states.
When does Social Security become tax-free?
The Social Security Administration refers to the amount that is subject to taxes as “combined income,” and it is this sum that determines whether or not a person’s Social Security benefits are taxable.
Low taxes shouldn’t be your only consideration when choosing a long-term residence, but you should still be informed of what taxes the local government collects so that you are not caught off guard when your next tax bill arrives. Your retirement income may be significantly reduced by state taxes on Social Security payments. If you want to retire in one of the 11 states that impose them, make financial preparations appropriately.
To make sure you’re receiving the greatest match for your financial situation, be sure to also do your homework on the additional prices and taxes you’ll be paying in each location you’re considering.