Many, if not most, people would agree that Social Security benefits are not enough to live on. After all, benefits only deliver an average of about 40% of pre-retirement income for medium earners and about 27% for maximum earners. The average monthly Social Security benefit was recently just about $1,666 — roughly $20,000 per year.
The news is a little worse than that, though — because if you live in one of 12 states, your state may tax your Social Security benefits, leaving you with even less.
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These 12 states tax Social Security
Here are the 12 offenders:
Colorado
Connecticut
Kansas
Minnesota
Missouri
Montana
Nebraska
New Mexico
Rhode Island
Utah
Vermont
West Virginia
If you’ve seen this list before and you thought it featured 13 states, you’re right — North Dakota has eliminated its tax on Social Security.
Good news — even if you live in one of these 12 states
Don’t start hyperventilating if you live in one of these states, because in many cases, they won’t take much, if any, of your benefits. Each state has its own rules and tax rates, and they don’t always apply to every resident evenly.
For example, in Connecticut, single residents with adjusted gross income (AGI) of less than $75,000 and married residents filing jointly with AGI less than $100,000 are not taxed on their Social Security benefits. Those earning more than those thresholds still get to exclude 75% of their Social Security income from taxation. Many of the other states have similar rules.
Note that if your Social Security income does get taxed, the tax rates vary widely by state, too — from 0% to around 8.75%. In some states the hit will be minor, in others, less so. The folks at AARP offer details for each state.
Here’s another important point to consider. Every state needs to generate revenue in some way, in order to keep the lights on and provide the services residents need and expect. So while some states may tax income very lightly or not at all, they may make up for that with a hefty sales tax and/or meaningful property taxes. It’s smart to consider the big picture when comparing taxation in different states.
Your state may not tax benefits, but Uncle Sam could
Don’t think you’re completely off the taxation hook if you live in one of the 38 states that don’t tax Social Security benefits — because your benefits may still get taxed by the federal government.
Up to 85% of your benefits may be taxed by Uncle Sam, and the table below offers the taxation thresholds. Note that your “combined income” is your AGI plus non-taxable interest, plus half of your Social Security benefits:
Filing As
Combined Income
Percentage of Benefits Taxable
Single individual
Between $25,000 and $34,000
Up to 50%
Married, filing jointly
Between $32,000 and $44,000
Up to 50%
Single individual
More than $34,000
Up to 85%
Married, filing jointly
More than $44,000
Up to 85%
Data source: Social Security Administration.
Be careful reading the table. Many people assume that it means they’ll get socked with an 85% tax rate, leaving them with only 15% of their benefits. Not so! It’s just that up to 50% or 85% of your benefits may face a tax hit — and that portion will be taxed at your income tax rate, which might be, for example, 12% or 22%.
It’s worth spending some time learning more about Social Security — so that you can make some smart moves that help you get the most out of the program and build a more financially secure future for yourself.
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