Social Security is a crucial financial lifeline for millions of American retirees. According to the Center on Budget and Policy Priorities, without these monthly benefits, approximately 16.3 million seniors in the U.S. would fall below the poverty line.
For those already above it, every dollar matters. However, retirees living in nine states may find themselves taking home less than expected due to state taxes on Social Security benefits. Understanding these tax policies can help retirees better plan their finances and avoid unexpected tax burdens.
How Are Social Security Benefits Taxed?
Before diving into state-specific taxes, it’s essential to understand how Social Security benefits are taxed at the federal level. The Internal Revenue Service (IRS) uses a calculation called combined income to determine how much of a retiree’s Social Security benefits are subject to taxation.
Combined income is calculated as:
- Half of your Social Security benefit
- Plus, your adjusted gross income (AGI)
- Plus, any untaxed interest income
If your combined income exceeds specific thresholds, a portion of your benefits (up to 85%) could become taxable. Since Congress did not include adjustments for inflation when these laws were enacted in the 1980s and 1990s, more seniors find themselves taxed on their benefits as their income grows over time.
Managing income carefully, including withdrawals from retirement accounts and capital gains, is crucial to avoiding an unexpected federal tax bill. However, in some states, retirees must also navigate state-level taxes on their Social Security checks.
Which 9 States Tax Social Security Benefits?
While most states have eliminated Social Security taxation, nine still levy taxes on these benefits. If you live in one of these states, it’s important to review the specific tax laws and consider strategies to minimize your tax burden.
Here are the nine states that currently tax Social Security benefits:
- Colorado – Taxpayers over a certain age may qualify for deductions, but benefits are still partially taxable.
- Connecticut – Exemptions exist for lower-income retirees, but higher earners may pay state taxes on their benefits.
- Kansas – The state fully taxes Social Security benefits unless a retiree’s total income falls below a certain threshold.
- Minnesota – The state offers some deductions, but many retirees still pay taxes on a portion of their Social Security income.
- Missouri – Tax exemptions apply based on income levels, but some seniors still see their benefits taxed.
- Montana – Social Security benefits are taxed similarly to federal guidelines, with income determining the taxable portion.
- Nebraska – Tax reforms are gradually reducing the taxation of benefits, but they are still partially taxed.
- New Mexico – The state taxes benefits, but exemptions exist for lower-income retirees.
- Utah – Social Security benefits are taxable, but a credit system helps offset costs for some retirees.
How Retirees Can Reduce Their Tax Burden
If you live in one of these states, there are steps you can take to minimize the impact of Social Security taxes:
- Understand State Tax Laws – Research your state’s specific tax policies or consult a tax professional to determine how they apply to your situation.
- Optimize Withdrawals – Managing how and when you withdraw from retirement accounts can help keep your taxable income below certain thresholds.
- Move to a Tax-Friendly State – If taxes are significantly impacting your retirement budget, relocating to a state that does not tax Social Security benefits might be an option.
- Utilize Tax Credits and Deductions – Many states offer exemptions or credits that can lower the amount of taxable benefits.
Final Thoughts
Social Security benefits provide financial security for millions of retirees, but taxation can reduce the amount seniors receive. While the federal government taxes benefits based on income, retirees in nine states face additional state taxes. Understanding these tax rules, planning withdrawals carefully, and seeking professional advice can help retirees keep more of their hard-earned benefits.
If you live in one of these states, take proactive steps to assess your tax situation and explore strategies to lower your tax burden. Every dollar saved can contribute to a more comfortable and secure retirement.
Disclaimer: This article has been meticulously fact-checked by our team to ensure accuracy and uphold transparency. We strive to deliver trustworthy and dependable content to our readers.
