Retirees in these states should be glad to avoid state taxes, but they must also consider the federal tax implications.
Some things in life are just unavoidable: traffic jams during rush hour, losing socks in the laundry, and taxes. Taxes, in particular, follow you throughout all your working years and well into retirement for many people, including your Social Security payments.
Although Social Security retirement benefits come from a social program, they’re still income, so they’re not exempt from taxes. The silver lining, however, is that most people won’t be subjected to Social Security taxes on the state level. As of the start of September, 41 states don’t tax Social Security benefits. Let’s take a look at which.
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Here are the states that do not tax Social Security benefits
Along with Washington, D.C., the following 41 states do not tax Social Security benefits:
- 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
The newest member of this list is Kansas, which signed a law in June that eliminated its state tax on Social Security.
States where you may have to pay taxes on Social Security
Unfortunately, 41 states not taxing Social Security means there are still nine states remaining that do:
- Colorado
- Connecticut
- Minnesota
- Montana
- New Mexico
- Rhode Island
- Utah
- Vermont
- West Virginia
The bad news is the tax. The good news is that retirees in these states may not always be subjected to taxes, as states progressively do away with it. For instance, Missouri and Nebraska both taxed Social Security benefits until Jan. 1 of this year, and West Virginia plans to phase out its tax completely by 2026.
Other states don’t have definitive dates or legislation in place, but it’s not farfetched to believe that they will follow suit in the future. No state Social Security tax is a great way to attract retirees looking for tax-friendly places to settle down.
You can’t forget about Uncle Sam
The U.S. has taxes on the local, state, and federal levels. Unfortunately, living in a state without Social Security taxes doesn’t mean you get to avoid Social Security taxes on the federal level. Uncle Sam is always out to get his share.
To calculate your tax bill, the IRS uses your “combined income,” which includes the following:
- Adjusted gross income (AGI): Your total income from all non-Social Security sources (minus certain deductions if you have them).
- Nontaxable interest: This is interest income that is not subject to federal tax. Common examples are interest earned from Treasury and municipal bonds.
- Half of your Social Security benefits: This is 50% of your total Social Security benefits for the year.
Social Security uses your combined income to determine how much of your benefits are eligible to be taxed. Here how’s it’s broken down:
| 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.
How federal Social Security taxes work
The key distinction with federal Social Security taxes is that these percentages don’t tell you how much your benefits will be taxed; they just tell you how much is taxable. The portion of your benefits eligible to be taxed is added to your other income taxed at your regular income tax rate. That’s a key difference that works out in retirees’ favor.
Take a single person who has $10,000 of annual Social Security benefits that are subject to tax after going through the calculations above. They would not owe $10,000 in taxes. Instead, $10,000 would be added to their other income and then taxed at whatever tax bracket they’re in. If they’re in the 22% tax bracket, they’d owe just under $2,200.
Knowing the tax implications around your Social Security benefits is key to properly planning your retirement finances. It can help you avoid an unexpected tax bill or overestimate how much you owe (though the latter is the better option).
