Retirees: Don’t Panic Over State Income Taxes on Your Social Security

It’s a little-known fact that Social Security benefits can end up being subject to income taxes. At the federal level, it doesn’t even take that much income before at least a small portion of your benefits gets taxed, and there are some states that look to get into the revenue collection game with Social Security as well.

However, as much as it might seem like a massive problem to live in a state that taxes Social Security benefits, it’s often much less of a problem than you’d think. Here are three reasons why most people don’t have to worry about state income taxes on their Social Security.

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1. 38 states don’t tax Social Security at all

There are only a dozen states left that impose a state-level income tax on Social Security. If you live outside of Colorado, Connecticut, Kansas, Minnesota, Missouri, Montana, Nebraska, New Mexico, Rhode Island, Utah, Vermont, and West Virginia, then your state isn’t going to tax a single penny of what you get from the Social Security program.

The list of those states is set to dwindle in the coming years as well. Missouri has already passed a law that will make Social Security income completely exempt from state income tax as of 2024. In 2025, Nebraska is set to follow suit under recently passed legislation.

2. Many states that do sometimes tax Social Security have much higher income limits

It doesn’t take a huge amount of income to get some of your Social Security taxed at the federal level. Single filers can pay federal taxes on Social Security benefits if their combined income — all of their taxable income plus tax-exempt interest and one-half of their Social Security — exceeds $25,000. For joint filers, the minimum threshold is $32,000.

However, most of the dozen states above have much higher limits. For instance, West Virginia phased out Social Security income tax on married couples making $100,000 or less, with singles with incomes under $50,000 also exempt. New Mexico’s limits are even higher: $100,000 for singles and $150,000 for joint filers.

3. Some states also have more favorable tax provisions when they tax Social Security benefits

In addition, there are other provisions that are often favorable for those receiving Social Security. In Connecticut, no more than 25% of Social Security benefits are added to state taxable income, even though as much as 85% of benefits can be taxable at the federal level.

Meanwhile, in Colorado, those who are 65 or older don’t pay any tax on Social Security. A partial deduction is available to younger recipients between 55 and 64, allowing up to $20,000 in Social Security to go untaxed at the state level.

Don’t let the tax tail wag the retirement dog

Perhaps most importantly, keep in mind that taxes on Social Security are only one aspect of your financial life in retirement. For instance, if you have substantial income from investments that is subject to state income tax at a relatively higher rate in a given state, getting an exemption on Social Security income might not make up the difference compared to living in a lower-cost state. Overall costs of living can be much lower in some states that tax Social Security.

Obviously, no one likes to pay taxes. For retirees, it’s especially important to make sure you can save whatever money you can. But it doesn’t make sense to panic just because your state of residence makes the list of those that sometimes charge income taxes on Social Security. Often, other factors will make that state the right choice for you.