Social Security benefits are a crucial lifeline for millions of Americans. Many depend on these monthly payments as their primary source of income. However, not everyone is aware that nine states in the U.S. impose taxes on Social Security benefits. This article highlights which states tax benefits, how it affects recipients, and what changes are coming in 2025. Understanding these taxes will help people minimize their financial burdens and plan accordingly.

Social Security Benefits: A Lifeline for Many Americans

The Social Security Administration (SSA) was established in 1935 to provide financial support through various programs. These programs include:

• Retirement Benefits: Monthly payments for those who reach retirement age.
• Social Security Disability Insurance (SSDI): Payments for individuals unable to work due to disabilities.
• Survivor Benefits: Financial assistance for the families of deceased workers.
• Supplemental Security Income (SSI): Support for low-income individuals and families.
• Medicare: Health insurance for people aged 65 and older, or younger individuals with certain disabilities.

As of late 2024, over 68 million Americans are receiving Social Security benefits in some form. People qualify for retirement benefits based on the work history and credits they accumulate throughout their careers. While retirement benefits can begin at 62, the full retirement age is between 66 and 67, depending on the year of birth.

Social Security Disability Insurance (SSDI) is available for those who are no longer able to work due to a disability. Survivor benefits help the families of deceased workers maintain their financial stability. SSI is for those with limited income and resources who are economically vulnerable.

For many, these benefits represent a critical source of income, and in 2025, changes to Social Security will impact how these payments are taxed and administered.

Nine States Will Tax Social Security Benefits in 2025

Nine states in the U.S. currently tax Social Security benefits, and each state has its own rules and exemptions. These states are:

• Colorado
• Connecticut
• Minnesota
• Montana
• New Mexico
• Rhode Island
• Utah
• Vermont
• West Virginia

Each state justifies this taxation as a means of generating revenue for public services and balancing state budgets. However, critics argue that taxing Social Security benefits places an additional financial burden on retirees, especially those on fixed incomes. Middle- and upper-income retirees, in particular, may face difficulties if they do not qualify for exemptions or deductions.

Let’s break down the tax policies for Social Security benefits in each of these states.

Breakdown of State Taxes on Social Security Benefits

1. Colorado

Colorado taxes Social Security benefits, but there is an exemption for those between the ages of 55 and 64. Individuals with an adjusted gross income (AGI) below $75,000, or $95,000 for couples filing jointly, can fully deduct their federally taxed benefits when filing taxes.

2. Connecticut

In Connecticut, Social Security benefits are not taxed for individuals with an AGI below $75,000. Married couples filing jointly are exempt if their AGI is under $100,000.

3. Minnesota

Minnesota has a similar policy, exempting Social Security benefits from tax for individuals with an AGI of $82,190 or less, and couples with an AGI of $105,380 or less.

4. Montana

In Montana, Social Security benefits are tax-exempt for individuals with an AGI of $25,000 or less, and $32,000 for couples filing jointly.

5. New Mexico

New Mexico exempts Social Security benefits from taxation for individuals earning less than $100,000. The exemption applies to couples earning up to $150,000.

6. Rhode Island

Individuals in Rhode Island are exempt from paying taxes on Social Security benefits if their AGI is below $88,950. For married couples filing jointly, the threshold is $111,200.

7. Utah

Utah residents who make $30,000 or less annually, or couples earning $50,000 or less, are exempt from paying tax on their Social Security benefits.

8. Vermont

In Vermont, individuals who earn less than $50,000, or couples with a combined income under $65,000, are not required to pay taxes on Social Security benefits.

9. West Virginia

West Virginia is phasing out the taxation of Social Security benefits. Currently, individuals with an income over $50,000 are taxed, and the same applies to couples earning over $100,000. However, the state has a plan to reduce this tax by 35% for 2024 and 65% in 2025. By 2026, Social Security benefits will no longer be taxed in West Virginia.

How Can You Offset Tax Payments on Social Security Benefits?

Even though Social Security benefits are taxable in certain states, there are ways to reduce the impact. One option is utilizing tax-advantaged retirement accounts to save money for the future while minimizing tax liability. While interest earned on most savings is subject to taxation, there are other savings options that allow individuals to earn interest tax-free.

Some tax-free savings options include:

• Roth IRAs: Contributions are made with after-tax dollars, but the money grows tax-free, and withdrawals are also tax-free in retirement.
• Health Savings Accounts (HSAs): These accounts are designed for individuals with high-deductible health plans, allowing them to save money tax-free for medical expenses.
• Municipal Bonds: Interest on certain state or local bonds is exempt from federal taxes.

It’s important to explore various tax-saving strategies to minimize your tax burden and maximize your savings. Although every financial situation is different, taking steps to plan ahead can make a significant difference in the long run.

Conclusion

For many retirees, Social Security benefits are a crucial source of income. However, with nine states imposing taxes on these benefits, it’s important to stay informed about the rules and how they may impact your finances. Understanding how Social Security is taxed in each state and exploring ways to offset tax payments can help ensure that you make the most of your benefits. It’s essential to review your financial plans and take advantage of tax-saving strategies to reduce your overall tax liability and secure a better future.

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