Social Security is a crucial component of most American seniors’ retirement budgets. In the most recent edition of an annual Gallup poll, 60% of retirees said the government program is a major source of income for them. Another 28% said their monthly checks were at least a minor source of income.
Ensuring you keep every penny of your Social Security benefits is essential if you’re one of the 60 million Americans collecting retirement benefits. Unfortunately, retirees in nine states risk losing some of their monthly checks. Their state governments will tax Social Security benefits based on their income, cutting how much they get to keep by almost 10% in some cases.
Where to invest $1,000 right now? Our analyst team just revealed what they believe are the 10 best stocks to buy right now. Continue »
Here’s what you need to know.
Image source: Getty Images.
Before we dive into individual state tax policies, every senior needs to understand how the federal government taxes Social Security benefits.
The IRS uses a metric called “combined income” to determine what percentage, if any, of your Social Security benefits are taxable. Combined income is equal to half your Social Security income plus your adjusted gross income and any untaxed interest income. If that number exceeds a certain threshold, up to 85% of your benefits are counted as taxable income for your federal tax return.
Taxable portion of benefits
Combined income, individual
Combined income, married filing jointly
0%
Less than $25,000
Less than $32,000
Up to 50%
Between $25,000 and $34,000
Between $32,000 and $44,000
Up to 85%
More than $34,000
More than $44,000
Data source: Internal Revenue Service.
Seniors who aren’t extremely careful about keeping their adjusted gross income low could easily find that a significant portion of their Social Security benefits end up as taxable income. That’s because Congress hasn’t adjusted those thresholds for inflation since enacting them in the 1980s and 1990s.
As such, more and more seniors are finding that they have to pay back a portion of their Social Security benefits in taxes. But that problem is worse for seniors living in nine states.
The number of states taxing Social Security benefits has shrunk significantly over the years. Residents of Missouri, Nebraska, and Kansas recently received some tax relief after their governors signed laws eliminating taxes on benefits effective as of 2024.
However, if you live in one of the following nine states, you may still have to share some of your retirement benefits with your state government. It may be worth consulting a tax professional to see how the state tax law applies to your personal situation, and how you may be able to reduce or eliminate the taxes you have to pay in retirement.
Here are the basics for each state.
Colorado: Taxpayers 65 or older, or those with an adjusted gross income below $75,000 for individuals or $95,000 for joint filers, are exempt from taxes on Social Security. Those with higher AGIs under age 65 can deduct up to $20,000 of the amount of Social Security income included on their federal tax return. Any amount above that will incur a 4.4% tax.
Connecticut: Taxpayers with adjusted gross income below $75,000 for individuals or $100,000 for joint filers are exempt from taxes on Social Security. No more than 25% of Social Security benefits are taxable for those with higher AGIs. The applicable tax rate ranges from 4.5% to 6.99%, depending on income.
Minnesota: Taxpayers with adjusted gross income below $84,490 for individuals and $108,320 for joint filers are exempt from taxes on Social Security. Every $4,000 of AGI above those thresholds increases the amount of Social Security benefits subject to taxes by 10% of the amount included on your federal return. The applicable tax rate ranges from 6.8% to 9.85%.
Montana: Any Social Security income included in your federal taxes is also subject to state taxes. Taxpayers over the age of 65 receive an additional $5,660 deduction on their state taxes. The tax rate ranges from 4.7% to 5.9%.
New Mexico: Taxpayers with adjusted gross income below $100,000 for individuals and $150,000 for joint filers are exempt from taxes on Social Security. All other taxpayers must pay income tax on any amount included in their federal taxes. The applicable tax rate ranges from 4.9% to 5.9%.
Rhode Island: Taxpayers with adjusted gross income below $104,200 for individuals and $130,250 for joint filers are exempt from taxes on Social Security. All other taxpayers must pay income tax on any amount included in their federal taxes. The applicable tax rate ranges from 4.75% to 5.99%.
Utah: Any Social Security income included in your federal taxes is also subject to state taxes. Taxpayers with adjusted gross income below $45,000 for individuals and $75,000 for joint filers qualify for a tax credit offsetting the taxes on Social Security income included in their federal taxes. Those above the threshold may still qualify for a partial credit. The applicable tax rate is 4.55%.
Vermont: Taxpayers with adjusted gross income below $50,000 for individuals and $65,000 for joint filers are exempt from taxes on Social Security. Those within $10,000 of each threshold will qualify for a partial deduction. Those with AGIs exceeding $60,000 for individuals and $75,000 for joint filers will owe taxes on any amount included in their federal taxes. The applicable tax rate ranges from 3.35% to 8.75%.
West Virginia: Taxpayers with adjusted gross income less than $50,000 for individuals or $100,000 for joint filers are exempt from taxes on Social Security. Those with higher AGIs must pay taxes on 35% of any Social Security income included in the federal taxes in 2025. West Virginia will no longer tax Social Security income for anyone starting in 2026. The applicable tax rate ranges from 4.44% to 4.82%.
While nobody wants to pay more than they have to in taxes, your decision about where to live in retirement shouldn’t be based on taxes alone. For one thing, tax policies change all the time. As mentioned, several states have eliminated taxes on Social Security in recent years, and West Virginia will join them next year.
More importantly, taxes are just a single financial consideration. Home prices, property taxes, and other key cost-of-living expenses could be drastically different in one state compared to another.
Additionally, consider the community you’re retiring to. An area with lots of senior services and activities can be worth paying a few extra dollars in taxes for. Those factors will have a much bigger effect on the quality of your retirement than maximizing your retirement benefits.
But if minimizing your tax bill is important, there are a few things you should consider. You may focus on putting more money into Roth retirement accounts while you’re working, or converting pre-tax retirement savings to Roth accounts before collecting Social Security. Likewise, taking capital gains and increasing the cost-basis of your taxable investments could help save more money in the long run.
You can discuss your options with a professional tax planner. The tax savings from a consult will usually make doing so worth the time and money. What’s true for almost everyone, though, is that the earlier you start planning for taxes in retirement, the better you’ll be able to avoid them.
If you’re like most Americans, you’re a few years (or more) behind on your retirement savings. But a handful of little-known “Social Security secrets” could help ensure a boost in your retirement income.
One easy trick could pay you as much as $22,924 more… each year! Once you learn how to maximize your Social Security benefits, we think you could retire confidently with the peace of mind we’re all after. Join Stock Advisor to learn more about these strategies.
View the “Social Security secrets” »
The Motley Fool has a disclosure policy.
Retirees in These 9 States Risk Losing Some of Their Social Security Checks was originally published by The Motley Fool
