Only These 8 States Tax Social Security, But Your Benefits Might Still Taxed Anyway
Most retirees assume they know whether their Social Security benefits will be taxed, but a little-known income calculation catches many off guard regardless of which state they call home.
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If you’re approaching retirement, it may be time to start thinking about when you’ll claim Social Security. And it’s also a good idea to create a Social Security account at SSA.gov and access your most recent earnings statement to get an estimate of your monthly benefit.
But you can’t assume you’ll get to keep your monthly benefits in full. Depending on where you live, your state might come after you for taxes on your Social Security checks. And even if you live in a state that doesn’t tax Social Security, you might owe the IRS money on those benefits anyway.
The states that tax Social Security
There are only eight states that tax Social Security. The list used to be longer, but a number of states have done away with that tax in recent years.
The current states where you could face taxes on your benefit checks include:
- Colorado
- Connecticut
- Minnesota
- Montana
- New Mexico
- Rhode Island
- Utah
- Vermont
But even within this list, you may be able to qualify for an exemption, allowing you to avoid taxes on your Social Security benefits. So don’t assume that you’re automatically going to have to fork over money to your home state.
You might face taxes on your benefits anyway
Even if you don’t reside in one of the states above, federal taxes can still apply to Social Security. So depending on your income, you could end up having to pay regardless of where you live.
Whether you owe taxes on your Social Security benefits depends specifically on your provisional income. That’s calculated as the sum of the following:
- Adjusted gross income
- Tax-exempt interest income
- 50% of your annual Social Security benefit
If your provisional falls between $25,000 and $34,000, and you file taxes as someone who’s single, up to 50% of your Social Security benefits could be subject to tax. Above $34,000, up to 85% of your benefits could be taxed.
If you’re married filing a joint tax return, you could face taxes on up to 50% of your Social Security benefits if your provisional income is between $32,000 and $44,000. Above $44,000, up to 85% of your benefits could be taxed.
To be clear, this doesn’t mean you’ll lose 85% of your benefits. It means that percentage of your Social Security can be subject to taxes.
So if your monthly benefit is $2,000 and you’re single with a provisional income of $50,000, up to $1,700 in Social Security can be taxable. But that doesn’t mean you’ll have to give the IRS $1,700 of your check and only keep $300.
Still, the rules regarding taxed benefits can sting, especially since the provisional income thresholds are so low. The problem is that they were established decades ago but have not been adjusted to match inflation.
If you expect to have a moderate income in retirement or higher, you should probably plan to pay taxes on your Social Security benefits — even if you don’t live in one of the eight states that have their own tax. It could also pay to work with a financial professional, as they may be able to share strategies on how to minimize your tax bill overall.
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Maurie Backman has more than a decade of experience writing about financial topics, including retirement, investing, Social Security, and real estate. Her work has appeared on sites that include The Motley Fool, USA Today, U.S. News & World Report, and Kiplinger.
Prior to becoming a full-time financial writer, Maurie worked in the financial industry trading distressed debt. She then changed course and spent a few years designing electronic toys. After a stint in content marketing and UX, she shifted back into writing and has since covered everything from the housing market to estate planning to Medicare.
When she's not busy writing, Maurie can be found hiking, walking her dogs, driving her kids to their various sports practices and games, and curling up with a good book. She cooks on occasion and bakes way too often.
