Minnesota has long been one of the few states that taxed Social Security benefits, a policy that many retirees found burdensome. However, starting in 2025, the state is implementing major tax reforms aimed at reducing, and in some cases eliminating, taxes on Social Security income. This move is expected to provide financial relief to thousands of retirees, making Minnesota a more attractive place to retire.
But what do these tax changes mean in real terms? How much will retirees actually save, and who will benefit the most? Let’s break down the details of the new policy, its impact, and how Minnesota compares to other states.
Minnesota’s Social Security Tax Reform: What’s Changing?
For years, Minnesota was one of only 10 states that taxed Social Security benefits. The amount of tax owed depended on a retiree’s adjusted gross income (AGI), with higher-income seniors facing larger tax burdens. However, in 2025, the Minnesota legislature has passed a tax reform bill that will significantly reduce or eliminate these taxes for many residents.
Key Changes in 2025:
- Higher Exemption Thresholds:
- Previously, retirees with incomes above a certain threshold paid taxes on a portion of their Social Security benefits. The 2025 reform raises these thresholds, meaning more retirees will qualify for full or partial tax exemptions.
- Full Tax Exemption for Lower-Income Seniors:
- Retirees with incomes below a set level (to be determined based on federal guidelines) will no longer pay state taxes on their Social Security benefits.
- Partial Tax Reductions for Middle-Income Retirees:
- Those with moderate incomes will see a reduced tax rate on their benefits, even if they don’t qualify for full exemption.
- Annual Adjustments for Inflation:
- The exemption thresholds will be indexed to inflation, preventing retirees from unexpectedly falling into a taxable category due to rising costs.
How Much Will Retirees Save?
The amount of savings varies based on income levels, filing status, and previous tax liabilities. Here’s an estimate of potential savings:
- Low-income retirees (AGI below $75,000 for single filers, $100,000 for joint filers)
- 2024 tax: $500 – $1,200 per year
- 2025 tax: $0
- Savings: Up to $1,200 annually
- Middle-income retirees (AGI between $100,000 – $150,000 for joint filers)
- 2024 tax: $1,200 – $2,500 per year
- 2025 tax: $500 – $1,500 per year
- Savings: $700 – $1,000 annually
- Higher-income retirees (AGI above $150,000 for joint filers)
- 2024 tax: $2,500 – $4,000 per year
- 2025 tax: $1,500 – $3,000 per year
- Savings: Around $1,000 annually
For many retirees, these tax cuts mean more money for everyday expenses, travel, healthcare, or savings.
Why Is Minnesota Making This Change?
Minnesota’s decision to reduce Social Security taxes is driven by several factors:
1. Encouraging Retirees to Stay in Minnesota
Many retirees move to states like Florida, Texas, or South Dakota to avoid state income taxes on their Social Security benefits. By reducing the tax burden, Minnesota aims to retain more retirees, preventing a loss of tax revenue from other sources like property and sales taxes.
2. Addressing Cost of Living Challenges
Minnesota has a relatively high cost of living, and retirees on fixed incomes often struggle with expenses. Lowering Social Security taxes helps ease financial pressures on seniors.
3. Keeping Up with National Trends
Most states have already eliminated Social Security taxes, and Minnesota’s move aligns it with national trends toward tax relief for retirees.
How Minnesota Compares to Other States
With this reform, Minnesota moves closer to being a tax-friendly state for retirees. Here’s how it compares:
- No Social Security Tax: Florida, Texas, South Dakota, Tennessee, and 34 other states already exempt Social Security benefits from taxation.
- Partial Exemptions: Minnesota will now join states like Colorado and Missouri, where certain income levels qualify for tax reductions.
- Still Taxing High Earners: Unlike states with full exemptions, Minnesota will still tax Social Security benefits for retirees with very high incomes.
Future Outlook: Could Taxes Be Cut Even Further?
While this reform is a significant step, some policymakers and advocacy groups argue that Minnesota should fully eliminate Social Security taxes to remain competitive. Potential future changes could include:
- Further raising exemption limits so that middle-income retirees get full relief.
- Expanding tax cuts to other retirement income, such as pensions and 401(k) withdrawals.
- Lowering property taxes for seniors, another major financial concern for retirees.
Final Thoughts: A Win for Minnesota Retirees
Minnesota’s 2025 tax reforms provide substantial relief for retirees, reducing or eliminating taxes on Social Security benefits. For many seniors, this means hundreds or even thousands of dollars in annual savings, making retirement more affordable.
While the state still taxes higher-income retirees, this change aligns Minnesota with other states that are easing financial burdens on seniors. Whether more tax cuts follow in the future remains to be seen, but for now, retirees in Minnesota can celebrate a welcome financial break.
If you’re a retiree in Minnesota, now is a great time to review your financial plan and see how these tax cuts can benefit you!.
