Many Americans rely heavily on Social Security benefits for their retirement plans, with the Social Security Administration reporting that at least 50% of household income for those 65 and older comes from government programs. Thus, losing a portion of that monthly benefit check could seriously jeopardize many people’s retirement plans. If you currently qualify for retirement benefits from Social Security, it’s essential to know the states where retirees’ monthly checks might be at risk.
Social Security Benefits
Taxes are the primary factor that reduces benefits for most retirees. While the federal government taxes Social Security income if a retiree’s income exceeds a certain threshold, most states do not impose additional costs. However, 12 states currently tax Social Security for at least some of their citizens based on income levels.
Combined Income
The federal government uses a measure called “combined income” to tax Social Security benefits. Combined income includes half of your Social Security benefits, any untaxed interest income, and your adjusted gross income. Social Security benefits may be subject to income tax if your combined income exceeds certain thresholds. The following table shows how much of your Social Security earnings will be taxed based on combined income and filing status.
| Taxable Portion | Single Filer Income | Joint Filer 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 |
Tax Social Security Benefits
Currently, 38 states do not tax Social Security benefits. However, 12 states tax a portion of payments for some residents. Here are details about the states that tax Social Security benefits:
Colorado
- Exemption: Retirees 65 and older are exempt from state taxes on Social Security benefits.
- Tax Rate: 4.4% for individuals under 65 with more than $20,000 in taxable benefits.
Connecticut
- Exemption: Individuals with AGIs over $75,000 or $100,000 for joint filers.
- Tax Rate: 5.5% to 6.99%.
Kansas
- Exemption: Individuals with AGIs over $75,000.
- Tax Rate: 5.7%.
Minnesota
- Exemption: Taxpayers with AGIs over $78,000 or $100,000 for single or joint filers.
- Tax Rate: 6.8% to 9.85%.
Missouri
- Exemption: Taxpayers with AGIs over $85,000 or $100,000.
- Tax Rate: 5.4%, set to sunset in 2024.
Montana
- Exemption: Individuals with AGIs above $25,000 or $32,000.
- Tax Rate: Up to 85% of Social Security income.
Nebraska
- Exemption: Phasing out by 2025.
- Tax Rate: 3.51% to 6.84%.
New Mexico
- Exemption: Individuals with AGIs over $100,000 or $150,000.
- Tax Rate: 4.9% to 5.9%.
Rhode Island
- Exemption: Individuals with AGIs above $95,800 or $119,750.
- Tax Rate: 4.75% to 5.99%.
Utah
- Exemption: Individuals with AGIs above $45,000 for single filers and $75,000 for joint filers.
- Tax Rate: 4.65%.
Vermont
- Exemption: Individuals with AGIs over $50,000 or $65,000, or married couples with AGIs over $75,000.
- Tax Rate: 3.35% to 8.7%.
West Virginia
- Exemption: Individuals with AGIs above $50,000, or $100,000 for single or joint filers.
- Tax Rate: 5.12%.
Financial Planning
Retirees need to carefully consider the tax implications of their Social Security benefits, especially if they reside in or are planning to move to one of these 12 states. Knowing how combined income affects taxation can help in financial planning and maximizing retirement benefits.
Consideration for Moving
Despite the taxes, retirees should not avoid moving to these states outright. Factors such as overall cost of living, quality of life, and other state-specific benefits should also be taken into account when making retirement decisions.
Knowing the impact of state taxes on Social Security benefits is crucial for retirees. With 12 states taxing Social Security income, it’s important to plan accordingly and consider all factors that can affect retirement finances. By staying informed and proactive, retirees can better navigate the complexities of Social Security taxation and secure their financial future.
FAQs
Which states tax Social Security benefits?
Twelve states tax Social Security benefits, including Colorado, Connecticut, Kansas, Minnesota, Missouri, Montana, Nebraska, New Mexico, Rhode Island, Utah, Vermont, and West Virginia.
How is Social Security income taxed federally?
Social Security income is taxed based on combined income, with up to 85% taxable if income exceeds certain thresholds.
What is combined income?
Combined income includes half of your Social Security benefits, untaxed interest income, and adjusted gross income.
Are all retirees in these states affected by the tax?
No, only those with incomes exceeding certain thresholds are subject to state taxes on Social Security benefits.
Should I avoid moving to a state that taxes Social Security?
Not necessarily. Consider overall cost of living, quality of life, and other benefits before deciding.