Retirees in These States Are Losing Social Security Benefits Is Your State on the List?
When determining your monthly Social Security payment, the key factors are your retirement age and the amount you contributed over your working years, however, where you live can also influence how much you receive, particularly in states that tax Social Security benefits. While the federal government taxes benefits based on income levels, nine states have their own rules that can further reduce the amount of benefits you ultimately keep.
For most retirees, Social Security is a significant portion of their income, making state taxes on these benefits a crucial consideration. Currently, the majority of U.S. states do not impose taxes on benefits. However, residents of nine states—Colorado, Connecticut, Minnesota, Montana, New Mexico, Rhode Island, Utah, Vermont, and West Virginia—may see reductions in their payments due to state-level taxation.
These taxes can have a noticeable impact on retirees, especially since many rely heavily on Social Security to meet their living expenses. It’s important to understand both federal and state rules when planning for retirement in these areas. At the federal level, individuals with an income above $25,000 can expect to have up to 50% of their Social Security benefits taxed. If your income exceeds $34,000, up to 85% of your benefits may be subject to federal taxes. When state taxes are added, the total reduction can be even more significant.
In recent years, some states have revised their approach to taxing benefits. For example, Missouri, Nebraska, and Kansas previously taxed Social Security but have since removed those taxes. These changes occurred within the past two years as part of efforts to make their states more financially attractive to retirees. The rules in the nine states that still tax benefits however, vary considerably, and individual circumstances play a big role in determining how much tax is owed.
States that tax Social Security benefits
Colorado, for example, imposes taxes on residents under the age of 65 if they report more than $20,000 in taxable Social Security income on their federal tax returns. Retirees aged 65 or older are exempt from this state tax. In Connecticut, Social Security income is taxed if your federal taxable income exceeds $75,000, although there is a limit: only 25% of your Social Security payments can be taxed, and the rate ranges from 2% to 4.5%.
Minnesota offers some relief for lower-income retirees, allowing up to $4,560 in Social Security income to be deducted from taxable income. However, once an individual’s income surpasses $78,000, this deduction no longer applies, meaning higher-income retirees could face full taxation on their benefits. Other states have similarly varying approaches.
Montana’s tax rates on benefits range from 4.7% to 5.9%, while Vermont’s rates are higher, spanning from 3.35% to 8.75%. In New Mexico, only those with an adjusted gross income of $100,000 or more are taxed on Social Security benefits. Rhode Island, on the other hand, targets individuals who file for Social Security before reaching full retirement age. Utah has one of the lowest income thresholds for taxation, taxing Social Security income once an individual’s income exceeds $45,000.
The complexities of these state rules make it essential for retirees to understand the financial landscape in any state they are considering for retirement. As Alex Beene, a financial literacy instructor at the University of Tennessee at Martin, noted “Most of these situations have taxation that only comes in if you make over a certain income in retirement and can even come in phases that eventually dwindle down to nothing over time.” This gradual phasing of taxes may mean that retirees feel less of an impact as their income declines in later years.
Furthermore, in some cases, states that tax Social Security benefits may have other policies in place that make them more attractive from a financial standpoint. Beene explains, “For example, some states that don’t have a state income tax offset it by having a higher sales tax. It’s the same process with these Social Security taxes, which unfortunately can make these locations less desirable for retirees.”