Nobody likes to pay income taxes, but for retirees, a tax bill on Social Security can just add insult to injury. For those living on a fixed income, having to pay any part of their monthly Social Security checks to the IRS means that much less money to cover basic living expenses.
Fortunately, most states don't follow the federal rules in imposing income taxes on Social Security. Currently, 38 states charge no state income tax at all on benefits. That leaves a dozen states with a bad reputation for retirees, but when you look more closely at their rules, most of those 12 holdouts don't tax their senior citizens as much as you might think.
The 12 states currently taxing Social Security
As of 2022, you'll find Social Security taxes at the state level in Colorado, Connecticut, Kansas, Minnesota, Missouri, Montana, Nebraska, New Mexico, Rhode Island, Utah, Vermont, and West Virginia. That adds to the burden of some seniors, with federal taxes on benefits coming into play for single filers with incomes as low as $25,000 and married joint filers with incomes of $32,000 or more. Depending on your combined income — defined for federal purposes as one-half of your Social Security plus most other forms of taxable income — you could have to include as much as 85% of your benefits as taxable income on which your federal tax rate will apply.
However, nearly all of these 12 states follow rules that are less draconian than what the IRS mandates. In most cases, even some retirees who pay federal income tax on their Social Security will escape taxation at the state level.
Higher income limits
Most states that impose income taxes on Social Security have higher income thresholds than the $25,000 and $32,000 limits at the federal level. For instance, Connecticut residents making less than $75,000 as single filers or $100,000 as joint filers pay no state-level Social Security income tax, and even seniors above those levels get a 75% tax exemption. Kansas has a similar $75,000 income threshold regardless of filing status, while Missouri's limits are $85,000 and $100,000, respectively.
You'll find similar provisions in other states. Rhode Island's higher limits apply only to those who've reached full retirement age, while Vermont raised its income threshold in 2022, and West Virginia is phasing in an exemption for those making less than $50,000 for singles and $100,000 for joint filers.
Credits and deductions
Other states take a different approach toward giving seniors a break. Colorado allows recipients who are 55 to 64 years old to deduct $20,000 in retirement income, including Social Security as well as other income like pensions. Those 65 or older get a $24,000 deduction, with married couples getting to double-dip. Minnesota offers a less generous deduction of just over $4,000 for singles and more than $5,000 for joint filers, although it phases out above certain income limits. New Mexico has an $8,000 deduction for those 65 and older.
Utah offers a tax credit that essentially works out to a full exemption for those below certain income limits. Those above the limits can still get a partial credit in some cases.
Are state income taxes on Social Security heading for extinction?
Best of all, initiatives to reduce or eliminate state income tax on Social Security are moving forward in many of these 12 states. West Virginia's full exclusion below certain income limits takes effect this year, while New Mexico is looking at new income thresholds. Nebraska is hoping to phase out benefit taxation entirely by 2025, having accelerated earlier efforts to eliminate taxes by the end of the decade.
For those on a fixed income, state income taxes on Social Security are painful. Yet even in the few states that still impose such taxes, there are many provisions that reduce the impact on those who struggle the most to make ends meet.
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