Social Security benefits are essential for many retirees, but understanding how states handle taxation of these benefits can help you plan better for retirement. While most states in the U.S. do not tax Social Security benefits, nine states will still impose taxes in 2025. Here’s a breakdown of those states and their policies, so you can make informed decisions about where to live during your retirement years.
1. Colorado
In Colorado, Social Security benefits will continue to be taxed in 2025. However, there are exemptions for certain income levels. Recipients aged 55-64 with an adjusted gross income (AGI) of $75,000 or less (for individuals) or $95,000 or less (for couples filing jointly) can fully deduct federally taxed Social Security benefits when filing their state taxes.
2. Connecticut
Connecticut’s policy is similar to Colorado’s, offering tax exemptions based on AGI. Single filers and married individuals filing separately are exempt if their AGI is below $75,000. Married couples filing jointly can avoid taxes if their AGI is under $100,000.
3. Minnesota
Minnesota provides relief to retirees by exempting Social Security benefits for single filers with an AGI below $82,190. For married filers, the exemption applies to those with an AGI under $105,380.
4. Montana
Montana imposes taxes on Social Security benefits but offers a complete deduction for individuals with an AGI below $25,000 and joint filers with an AGI under $32,000. This exemption provides significant relief for lower-income retirees.
5. New Mexico
In New Mexico, individual Social Security recipients with an annual income of less than $100,000 are exempt from taxation. For married couples, the income limit for this exemption is $150,000, making it relatively generous compared to some other states.
6. Rhode Island
Rhode Island exempts Social Security benefits for individuals with an AGI below $88,950. Married couples with an AGI under $111,200 are also exempt, ensuring that many middle-income retirees can enjoy their benefits tax-free.
7. Utah
Utah’s tax exemption applies to individuals earning less than $30,000 annually. For married couples, the threshold is $50,000. If your income falls below these limits, you won’t have to pay state taxes on your Social Security benefits.
8. Vermont
In Vermont, individual filers with an income below $50,000 and married couples earning under $65,000 are exempt from taxation on their Social Security benefits. This policy provides relief to retirees with modest incomes.
9. West Virginia
West Virginia is in the process of phasing out taxes on Social Security benefits. Currently, individuals earning less than $50,000 and joint filers with incomes under $100,000 are exempt. By 2026, the state will eliminate taxes on these benefits entirely.
What This Means for Retirees
If you’re planning for retirement, knowing which states tax Social Security benefits is crucial. States like Missouri and Kansas, which recently eliminated these taxes, highlight the growing trend toward tax relief for retirees. However, the nine states listed above still impose taxes, albeit with income-based exemptions to ease the burden on lower-income residents.
Why Social Security Taxation Matters
Taxing Social Security benefits reduces the disposable income retirees have, impacting their ability to cover living expenses. States with exemptions based on income thresholds aim to balance revenue needs while protecting lower-income retirees.
Planning Your Retirement Location
For retirees looking to maximize their income, choosing a state without Social Security taxes or with generous exemptions is a smart move. Consider these factors when planning your retirement:
- Cost of Living: States with no Social Security taxes may have a higher cost of living.
- Healthcare Access: Quality and affordability of healthcare services are essential.
- Weather Preferences: Your comfort with the climate should factor into your decision.
Additional Considerations
- Federal Tax Implications: Remember, Social Security benefits may still be taxed federally depending on your total income.
- State Policies: Stay updated on state tax policies, as laws change periodically.
- Consult a Financial Advisor: A financial advisor can help you optimize your retirement income and minimize taxes.
Key Takeaway
If you rely on Social Security benefits, knowing how your state taxes them can significantly impact your retirement planning. While most states offer tax relief, understanding the rules in these nine states can help you decide where to live and how to manage your finances effectively.
