Social Security is a lifeline for millions of retirees across the United States, providing financial stability and peace of mind after years of hard work. However, depending on where you live, a portion of these benefits might be reduced due to state taxes. While most states have moved away from taxing Social Security benefits, a few will still continue this practice in 2025. Let’s dive into what this means and how it could affect you.
Which States Will Tax Social Security in 2025?
By 2025, nine states will still tax Social Security benefits. Two of these states, Missouri and Kansas, have recently eliminated these taxes, leaving a smaller list of states where retirees will need to account for these deductions.
Here’s a breakdown of the five key states that continue to impose taxes and how their tax structures might affect retirees:
1. Colorado
- Exemption Thresholds: Retirees earning less than $75,000 (single) or $95,000 (couple) can fully deduct federally taxed Social Security benefits.
- Impact: Those exceeding these limits will still face state taxes, making higher-income retirees bear the burden.
2. Connecticut
- Exemption Thresholds: Single retirees earning under $75,000 and couples earning under $100,000 will be exempt.
- Impact: This policy aims to provide relief to middle and lower-income retirees while still taxing higher earners.
3. Montana
- Exemption Thresholds: Only those earning below $25,000 (single) or $32,000 (couple) are exempt.
- Impact: Strict income caps mean many retirees with additional pensions or savings may still owe taxes.
4. Rhode Island
- Exemption Thresholds: Single retirees earning under $88,950 and couples earning under $111,200 qualify for exemptions.
- Impact: Most retirees fall below these limits, offering broad relief compared to other states.
5. Utah
- Exemption Thresholds: Individuals earning less than $30,000 and couples earning less than $50,000 are exempt.
- Impact: While lower-income retirees benefit, others will need to plan for potential tax obligations.
Why Do States Tax Social Security Benefits?
State taxes on Social Security benefits primarily serve to generate revenue to balance state budgets. While this can be a financial strain for retirees, it helps states fund essential services and maintain public programs.
Tips to Minimize the Impact of Social Security Taxes
Retirees have several options to reduce the financial impact of these taxes:
- Relocate to Tax-Friendly States: States like Florida and Texas do not tax Social Security benefits, making them popular destinations for retirees.
- Plan Your Income: Adjust your retirement withdrawals to stay within exemption thresholds in your state.
- Consult a Financial Advisor: Seek professional guidance to develop a tax-efficient retirement strategy.
States Favorable for Retirees
If avoiding Social Security taxes is a priority, consider moving to one of the 41 states that have eliminated these taxes altogether. Some of the most retiree-friendly states include:
- Florida: No state income tax and a warm climate.
- Texas: No income tax and a growing retiree community.
- Nevada: Offers tax advantages and attractive amenities for retirees.
Looking Ahead: Changes in Other States
A few states are in the process of phasing out Social Security taxes entirely. For example:
- West Virginia: Currently taxes Social Security benefits at 35%, with plans for full exemption by 2026.
- New Mexico: Offers generous exemptions for singles earning under $100,000 and couples under $150,000, showing efforts to ease the tax burden on retirees.
Conclusion
Social Security taxes can significantly impact retirees’ financial planning. While most states are moving toward eliminating these taxes, a few still impose them, requiring careful planning for residents. Whether you’re considering relocation or strategizing within your current state, understanding these policies is key to maximizing your retirement benefits.
