Key Points
States have been progressively eliminating their Social Security taxes.
Federal tax rules apply regardless of your state's rules.
How much you owe in federal taxes on Social Security is based on your combined income.
- The $23,760 Social Security bonus most retirees completely overlook ›
One thing in America that's seemingly unavoidable is taxes. There are taxes on your income, the home you own, the items you purchase, capital gains, and even inheritance. People may not be the biggest fans of taxes, but they're the reason we have many of the public services that we use daily.
Surprisingly to some, there are also taxes on the Social Security benefits you receive in retirement. The good news is that most recipients will be able to avoid these taxes because of their state's specific rules. The bad news is that millions will still be required to pay some form of tax on their benefits. Let's take a look at which bucket you may fall into.
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The states that do not tax Social Security benefits
The following 42 states, along with Washington, D.C., currently 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
- West Virginia
- Washington
- Wisconsin
- Wyoming
West Virginia is the newest member of this list, having removed its Social Security tax beginning this year.
Which states tax Social Security benefits?
The following eight states have Social Security taxes in some form:
- Colorado
- Connecticut
- Minnesota
- Montana
- New Mexico
- Rhode Island
- Utah
- Vermont
In the past few years, several states (like Missouri, Nebraska, and Kansas) have canceled their Social Security tax, so even if your state still taxes benefits, there's a chance that it will eliminate it in the future. There's no guarantee it will happen, but not taxing Social Security benefits is one way states can attract retirees and retain their current retirees. Where a state may lose out on Social Security tax revenue, it can make up for it by having those retirees spend money in-state and stimulate the economy.
You can't forget about federal taxes
Despite your state's specific rules, you could still be subject to federal taxes on your benefits. To determine your federal tax obligation, the IRS takes a look at your combined income, which consists of three parts:
- Your adjusted gross income (AGI)
- Half of your annual Social Security benefits
- Any tax-exempt interest (like Treasury or municipal bonds)
For example, someone whose AGI is $15,000, receives $30,000 in annual Social Security benefits, and receives $1,000 in tax-exempt interest would have a combined income of $31,000 ($15,000 + $15,000 + $1,000). Once your combined income is calculated, the following thresholds are used to determine how much you could possibly owe in federal taxes:
| 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 |
Data source: IRS.
The most important thing to note is that the percentages aren't how much your benefits will be taxed; it's how much is eligible to be taxed. The amount that's eligible to be taxed is added to your other taxable income and then taxed at your typical tax rate.
In this case, if the person from our example is single, they could have up to $15,000 of their benefits added to their taxable income. If they were in the 12% tax bracket, they would pay up to $1,800 in taxes on their $30,000 in annual benefits. That's a much better scenario than their benefits being taxed at 50% and owing $15,000.
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