Elderly Residents in Certain States Might Face Reduced Social Security Income Due to State Taxes by 2025
Elderly Residents in Certain States Might Face Reduced Social Security Income Due to State Taxes by 2025
Ever since Social Security retirement benefits became an option in 1935, they've been a lifesaver for numerous Americans, providing essential financial support.
For many retirees, Social Security serves as their sole income source, keeping them financially stable. For others, it acts as a handy bonus or additional income. Regardless of the situation, some Social Security beneficiaries are better off when it comes to paying taxes on their benefits compared to others.
Fortunately, not everyone will be affected, but there's a possibility that by 2025, residents of certain states might have to hand over some of their Social Security benefits to state income taxes.
Which states currently impose taxes on Social Security benefits?
There's a silver lining, as 41 states and Washington, D.C., home to over 90% of the senior population in the U.S., exempt Social Security benefits from taxes. However, this leaves nine states with some form of Social Security tax on their benefits.
These nine states are:
- Colorado
- Connecticut
- Minnesota
- Montana
- New Mexico
- Rhode Island
- Utah
- Vermont
- West Virginia
Single
To add to the positive news, in 2020, 13 states taxed Social Security benefits. Some states, such as Nebraska, Missouri, and Kansas, have abolished their Social Security taxes, even as recently as 2024.
$25,000 to $34,000
Each state governs Social Security taxes differently
Up to 50%
States possess the autonomy to set their own Social Security tax rules, with noticeable variations between them.
For example, in Colorado, retirees 65 and older can deduct all their Social Security benefits from their state income tax until 2025. After that, single filers earning less than $75,000 or joint filers earning less than $95,000 will be able to do the same.
Single
In Minnesota, only those with combined income exceeding certain thresholds are subject to Social Security taxes. These thresholds are:
More than $34,000
- $105,380 for couples filing jointly
- $82,190 for single filers
- $52,960 for couples filing separately
Up to 85%
In Utah, Social Security recipients must pay a flat 4.55% income tax rate on their benefits.
State regulations for Social Security benefits have proven to be flexible, often changing swiftly. If you currently reside in a state that taxes Social Security, it's essential to keep an eye out for changes in your state's policies.
Married, filing jointly
Don't forget about federal taxes
$32,000 to $44,000
Although states have their unique tax policies for Social Security benefits, it's important to acknowledge that residents are still required to comply with federal tax guidelines. Federal taxes on Social Security income primarily depend on one factor: your "combined income."
Up to 50%
Your combined income is calculated by considering the following:
- Adjusted Gross Income (AGI): Your total annual income, excluding Social Security.
- Nontaxable interest: Interest income that is exempt from federal tax, such as municipal and U.S. Treasury bonds.
- Half of your Social Security benefits: 50% of your total Social Security benefits for the year.
Married, filing jointly
For instance, if someone's AGI is $18,000, they have $1,000 in nontaxable interest, and they receive $24,000 in Social Security benefits for the year, their combined income would be $31,000 ($18,000 + $1,000 + $12,000).
More than $44,000
How the IRS determines your tax liability
Up to 85%
Once your combined income is calculated, the IRS employs the following rules to determine your tax liability:
| Filing Status | Combined Income | Percentage of Benefits Taxable || --- | --- | --- || Single | $25,000 to $34,000 | Up to 50% || Single | More than $34,000 | Up to 85% || Married, filing jointly | $32,000 to $44,000 | Up to 50% || Married, filing jointly | More than $44,000 | Up to 85% |
Continuing our previous example, let's assume that a single person has a combined income of $31,000. This means that up to 50% of their income is eligible for taxation, not that 50% of their benefits will be taxed.
Instead, the IRS can tax up to 50% of their combined income ($15,500), add it to their other income, and then charge taxes at their regular income tax rate. For someone in the 12% tax bracket, this could mean paying $15,500 in taxes versus $3,720 ($31,000 * 12%).
Most Social Security recipients will pay very little, if any, taxes on their benefits. Staying informed about state and federal guidelines is crucial to avoiding any unwanted surprises.
Despite the financial support provided by Social Security retirement benefits, some individuals may need to consider other sources of income during retirement due to potential state taxes. For instance, residents of Colorado, Connecticut, Minnesota, Montana, New Mexico, Rhode Island, Utah, Vermont, and West Virginia might need to allocate part of their Social Security benefits towards state income taxes.
Given the complexities of Social Security tax rules, it's essential for retirees to keep track of any changes in their state's policies to ensure they're fully aware of their financial situation and potential tax liabilities.