That’s right — some states tax Social Security benefits. Is yours one of them?
Here’s some good and bad news about Social Security income. On the plus side, while retirees are often considered to be living on fixed incomes, their Social Security income is not fixed. It’s regularly adjusted for inflation via “COLAs” — cost-of-living adjustments. Many times the hike is modest, such as 2020’s 1.3% increase or 2019’s 1.6% hike. But inflation has been significant recently, so the increase for 2023 was a whopping 8.7%, on top of 2021’s 5.9% bump.
That’s the good news. The bad news is that even though your Social Security benefits will increase over time, they may get reduced every year, too — if your state taxes them, as 12 states do.
The 12 states that tax Social Security benefits
Let’s cut to the chase. Here are the 12 states that do tax Social Security benefits:
- Colorado
- Connecticut
- Kansas
- Minnesota
- Missouri
- Montana
- Nebraska
- New Mexico
- Rhode Island
- Utah
- Vermont
- West Virginia
If you don’t see your state on that list, you’re in luck! Your state doesn’t tax Social Security benefits. But even if your state is on the list, there’s a decent chance it won’t tax you much, or perhaps at all.
That’s because each state has different rules and tax rates for Social Security — which can change over time. Until recently, for example, North Dakota taxed Social Security, but it no longer does. And legislators in Utah are considering removing their Social Security tax, too.
The tax hit might not be so bad
Meanwhile, among the states that do tax Social Security, many don’t tax it all that much, if at all. For example, Connecticut cut its Social Security tax a few years ago, so that now retirees with adjusted gross income (AGI) of less than $75,000 (or less than $100,000 for heads of households or joint filers) will not be taxed on their Social Security benefits.
Meanwhile, Minnesota recently enacted similar exemptions so that the Social Security benefits for single filers with AGI of up to $78,000 (and up to $100,000 for joint filers) will be fully deductible — i.e., not taxed.
If you live in one of those states or in one of the other 10 taxing states, read up on the details of the taxation, because you may not end up paying much at all.
Don’t forget Uncle Sam!
No matter which of the 50 states you live in, your Social Security benefits may still get taxed — by the federal government. Specifically, it might tax up to 85% of your benefits. Don’t hyperventilate when you see that 85% — it doesn’t mean you’ll face an 85% tax rate — just that up to 85% of your benefits may be taxed at your income tax rate, which could be, say, 12% or 22%.) Here are some specifics:
| FILING AS | COMBINED INCOME* | PERCENTAGE OF BENEFITS TAXABLE |
|---|---|---|
| Single individual | Between $25,000 and $34,000 | Up to 50% |
| Married, filing jointly | Between $32,000 and $44,000 | Up to 50% |
| Single individual | More than $34,000 | Up to 85% |
| Married, filing jointly | More than $44,000 | Up to 85% |
Plan for more than Social Security
Be sure that you’re not planning to survive in retirement on Social Security alone, because it’s not meant to fully replace your pre-retirement income. In fact, for many people, it provides around 40%. The average Social Security retirement benefit was only $1,836 as of May, 2023 — which comes to about $22,000 per year.
Clearly, that’s not sufficient for most people, so take some time to develop a solid retirement plan, estimating how much income you’ll need in retirement and how you will get it. You might build a portfolio of dividend-paying stocks, for example, and/or you might purchase an annuity that delivers regular income.
Note, too, that there are ways to increase your Social Security benefits — such as by delaying when you start collecting it. Read up on Social Security so that you can make decisions that help you get the most out of it.
