Some Americans get smaller Social Security checks than they expected each month. Before you start to panic, this only applies to some states, and it only applies to some taxpayers within those states. There are a handful of states that tax Social Security income. Read on to figure out if you’re impacted by these often overlooked taxes on retirees.
The states in question
There are 12 states that currently tax Social Security benefits in some way:
North Dakota was on this list until recently, so congratulations to all the North Dakotans who are benefiting from the adjustments to the state’s tax code. Even if your state is listed above, you still might not owe any taxes on Social Security benefits. Many of them have deductions and income thresholds to protect seniors who are living on strict budgets.
Colorado has a flat income tax rate of 4.55%. Previously, residents of the state could deduct the first $20,000 of Social Security benefits. Moving forward, Coloradoans will be able to deduct the same amount of Social Security income from their state taxes that they deduct from federal income tax.
Single filers can deduct the first $25,000 of Social Security from federal taxable income, then they’re only taxed on half of the benefits from $25,000 to $34,000. Above that level, 85% of the income is taxable. This means most people in Colorado will be able to deduct all of their federal retirement benefit, and even the people that have to pay will be able to deduct a large percentage of the benefit.
Connecticut taxpayers don’t owe anything on Social Security as long as their adjusted gross income (AGI) is under $75,000 (or $100,000 for joint filers). Even above those thresholds, 75% of federal retirement benefits are deductible. The effective rate runs from roughly 3% to 7%, depending on income bracket. State legislators have repeatedly reduced the tax burden on seniors, so things are improving from this standpoint.
Social Security benefits are taxed as ordinary income in Kansas. However, that income is exempt for anyone reporting AGI below $75,000, which applies to most retirees. This applies to people of every filing status.
Only a portion of Social Security income is subject to Minnesota state taxes. The proportion of benefits that is exempted is based on income, with higher brackets bearing the majority of tax liability. This has been hotly contested in the state legislature, and lawmakers reached a deal early this year that could eliminate all state taxes on Social Security as early as this year.
Missouri fully exempts Social Security benefits from state income tax for single filers claiming less than $85,000 and joint filers below $100,000 in AGI. There’s a partial exemption that’s phased out for every dollar earned above those thresholds. The highest tax bracket in the state is 5.4%.
Montana is another state that follows federal AGI thresholds for Social Security exemptions. The amount of benefits that are subject to taxation increases along with AGI, but up to 85% of benefits are taxable at the highest level, which is around $35,000.
Nebraska exempts Social Security benefits from taxation for single filers claiming less than $45,000 in AGI and joint filers claiming under $60,000. Beyond these thresholds, Nebraska’s code follows the same guidelines as Social Security benefit taxation at the federal level. Lawmakers in Nebraska passed a bill this year that will phase out those taxes over the next several years, and the benefits will be completely exempt starting in 2025.
New Mexico recently changed its tax code to exempt the vast majority of seniors from paying taxes on Social Security benefits. This is available to single filers claiming under $100,000 and joint filers claiming under $150,000. That still leaves affluent retirees with a liability on Social Security income, and rates can approach 6% for high earners in the state.
Rhode Island offers exemptions from Social Security taxation for single filers claiming AGI under $88,950 and joint filers claiming under $112,000. Beyond that, deductions follow the federal schedule. Income tax rates in the state can rise as high as 6%.
Social Security income is exempt from Utah taxation for joint filers with AGI below $50,000 after new legislation last year. Utah has a flat 4.85% tax rate, but it also offers a partial credit that’s slowly phased out for AGI above the exemption thresholds.
Vermont’s Social Security income exemption applies to single-filing residents who claim less than $45,000 in AGI and $60,000 for joint filers. Partial exemptions apply to the next $10,000 of income for both filing statuses, which are phased out over that range. Beyond that, there are no special concessions made for Social Security benefits, and state tax rates can climb as high as 8.75%
Last year, West Virginia allowed joint filers claiming under $100,000 to exclude 65% of Social Security benefits from state income tax. That figure is only $50,000 for single filers. Starting this year, West Virginia residents under those levels can exempt all of their Social Security benefits. However, anyone claiming income above those levels will follow the federal taxation schedule.
As you can see, these matters can be complicated, and the situation varies from household to household. Tax treatment of Social Security benefits is also in flux in many states as legislation is passed to extend certain protections to seniors. It’s wise to consult a tax professional who is knowledgeable about state-specific guidelines on Social Security income if you live in one of the above states and aren’t sure about your personal liability.
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