Understanding State Tax Rules on Social Security Benefits
Few people celebrate tax payments, yet they are essential for society’s functioning. Taxes arise from various activities such as purchases, property interests, and income.
It is important to note that income taxes can extend beyond just wages. Social Security benefits are also taxable. The taxability of these benefits significantly depends on your state of residence.
If you currently receive or expect to receive Social Security retirement benefits, it’s crucial to understand how different states treat these benefits. Below, you will find details on the states that do and do not tax Social Security benefits.
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States That Do Not Tax Social Security Benefits
Fortunately for recipients, many states do not impose taxes on Social Security benefits. The list includes 41 states as well as Washington, D.C. They are:
- Alabama
- Alaska
- Arizona
- Arkansas
- California
- Delaware
- Florida
- Georgia
- Hawaii
- Idaho
- Illinois
- Indiana
- Iowa
- Kansas
- Kentucky
- Louisiana
- Maine
- Maryland
- Massachusetts
- Michigan
- Mississippi
- Missouri
- Nebraska
- Nevada
- New Hampshire
- New Jersey
- New York
- North Carolina
- North Dakota
- Ohio
- Oklahoma
- Oregon
- Pennsylvania
- South Carolina
- South Dakota
- Tennessee
- Texas
- Virginia
- Washington
- Wisconsin
- Wyoming
Notably, Missouri, Nebraska, and Kansas have recently removed their state tax on Social Security benefits starting in 2024.
States That Do Tax Social Security Benefits
Conversely, several states continue to tax Social Security benefits, affecting a sizeable number of recipients. The affected states include:
- Colorado
- Connecticut
- Minnesota
- Montana
- New Mexico
- Rhode Island
- Utah
- Vermont
- West Virginia
For residents of these states, it’s important to understand the specific tax regulations, which can fluctuate. For instance:
- In Utah, the flat income tax rate is 4.55% on Social Security benefits.
- Connecticut allows the deduction of all federally taxable Social Security income for individuals with an AGI below $75,000 if single or $100,000 for married couples filing jointly.
- Coloradans aged 65 and above can deduct federally taxed Social Security, while those under 65 can deduct up to $20,000.
Understanding Federal Taxes on Social Security
While the 41 states mentioned above do not tax Social Security benefits, recipients still face potential federal taxes on these benefits.
The IRS assesses your tax obligation based on your combined income, which includes your adjusted gross income (AGI), half of your annual Social Security benefit, and any nontaxable interest (such as certain bond earnings).
For example, if your AGI is $25,000, you receive $20,000 annually from Social Security, and you have $500 in nontaxable interest, your combined income would be $35,500 ($25,000 + $10,000 + $500).
The IRS uses this combined income to determine the taxable portion of your Social Security benefits using the ranges below:
| Percentage of Taxable Benefits Added to Income | Filing Single | Married, Filing Jointly |
|---|---|---|
| 0% | Less than $25,000 | Less than $32,000 |
| Up to 50% | $25,000 to $34,000 | $32,000 to $44,000 |
| Up to 85% | More than $34,000 | More than $44,000 |
Source: Social Security Administration.
Calculating Federal Taxes on Your Benefits
It’s important to note that the percentages shown indicate what portion of your Social Security benefits is subject to taxation, not the actual tax rate applied. The taxable portion is combined with your other income and taxed at your current income tax rate.
For instance, if you are married filing jointly and your combined income is $40,000 with $20,000 from Social Security, the taxable amount is calculated. In this case, only up to 50% of the benefits are added to your total income and taxed according to the applicable rate.
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