Social Security Tax Alert: For retirees relying on Social Security, understanding how their benefits will be taxed is a critical part of financial planning. While federal taxes on Social Security benefits depend on your income level, state taxes add another layer of complexity. In 2025, nine states will continue to tax Social Security benefits, each with its own rules and exemptions. Here’s a comprehensive guide to help you navigate Social Security taxation at the state level and optimize your retirement income.
Social Security Tax Alert
Understanding how Social Security benefits are taxed at both the federal and state levels is essential for retirees to effectively manage their finances. While nine states impose taxes on benefits in 2025, many offer exemptions or credits based on income. By staying informed, planning strategically, and seeking professional advice, retirees can minimize their tax burden and maximize their income during retirement.
| State | Taxation Policy |
|---|---|
| Colorado | Taxes Social Security benefits, but residents 65+ can fully deduct federally taxed benefits. From 2025, residents aged 55–64 with income under $75,000 (single) or $95,000 (joint) are also exempt. |
| Connecticut | Exempts Social Security benefits for single filers with AGI < $75,000 and joint filers < $100,000. Partial taxation applies above these thresholds. |
| Minnesota | Offers exemptions based on income thresholds: joint filers under $105,380 and single filers under $82,190 are exempt from taxation. |
| Montana | Taxes Social Security, but full exemptions apply for single filers with AGI under $25,000 and joint filers under $32,000. |
| New Mexico | Exempts benefits for single filers earning < $100,000 and joint filers < $150,000. |
| Rhode Island | Exempts benefits for single filers with AGI < $88,950 and joint filers < $111,200. |
| Utah | Provides tax credits to offset Social Security taxes for single filers < $30,000 and joint filers < $50,000. |
| Vermont | Exempts benefits for single filers < $50,000 and joint filers < $65,000. Partial exemptions up to $59,999 (single) and $74,999 (joint). |
| West Virginia | Phasing out Social Security taxation: 65% exempt in 2025, with full exemption by 2026. |
Understanding Social Security Taxation at the State Level
While federal taxes on Social Security benefits apply to individuals with a combined income exceeding $25,000 (or $32,000 for married couples filing jointly), state taxation policies vary significantly:
- No State Tax: Forty-one states and Washington, D.C., do not tax Social Security benefits, providing retirees in these areas some financial relief.
- States Taxing Benefits: Nine states impose taxes on Social Security benefits, but most offer exemptions or credits based on income thresholds or age.
Let’s dive into the taxation policies of each state and what they mean for retirees in 2025.
States That Will Tax Social Security Benefits in 2025
1. Colorado
- Tax Policy: Social Security benefits are taxable.
- Exemptions:
- Residents aged 65 and older can deduct federally taxed benefits.
- Starting in 2025, residents aged 55 to 64 with adjusted gross income (AGI) under $75,000 (individuals) or $95,000 (couples) can also deduct benefits.
2. Connecticut
- Tax Policy: Social Security benefits are partially taxable.
- Exemptions:
- Single filers with AGI below $75,000 and joint filers below $100,000 are fully exempt.
- For those above these thresholds, up to 25% of benefits may be taxed.
3. Minnesota
- Tax Policy: Social Security benefits are taxable.
- Exemptions:
- Single filers with AGI below $82,190 and joint filers below $105,380 are exempt.
- Above these thresholds, taxes are applied to a portion of benefits.
4. Montana
- Tax Policy: Taxes Social Security benefits.
- Exemptions:
- Single filers with AGI under $25,000 and joint filers under $32,000 are fully exempt.
5. New Mexico
- Tax Policy: Social Security benefits are partially taxable.
- Exemptions:
- Single filers earning less than $100,000 and joint filers earning less than $150,000 are fully exempt.
6. Rhode Island
- Tax Policy: Taxes Social Security benefits.
- Exemptions:
- Single filers with AGI below $88,950 and joint filers below $111,200 are exempt.
7. Utah
- Tax Policy: Social Security benefits are taxable.
- Exemptions:
- A tax credit is available for single filers earning less than $30,000 and joint filers earning less than $50,000.
8. Vermont
- Tax Policy: Social Security benefits are taxable.
- Exemptions:
- Single filers with AGI below $50,000 and joint filers below $65,000 are fully exempt.
- Partial exemptions apply for AGI up to $59,999 (single) and $74,999 (joint).
9. West Virginia
- Tax Policy: Phasing out Social Security taxes.
- Exemptions:
- 65% of benefits will be exempt in 2025, with a full exemption by 2026.
Strategies to Minimize Social Security Tax
If you reside in a state that taxes Social Security, consider these strategies to minimize the tax burden:
1. Relocate to a Tax-Free State
If you’re flexible about where to retire, consider moving to one of the 41 states that do not tax Social Security benefits, such as Florida, Texas, or Nevada.
2. Manage Your Income
Keep your AGI below your state’s exemption threshold by:
- Spreading withdrawals from retirement accounts over several years.
- Timing capital gains or other taxable events strategically.
3. Utilize Tax Credits
In states like Utah, explore tax credits that offset Social Security taxes based on income.
4. Consult a Financial Advisor
A financial advisor can help structure your income and retirement withdrawals to minimize taxes while maximizing benefits.
Frequently Asked Questions (FAQs)
1. Do all states tax Social Security benefits?
No, only nine states tax Social Security benefits in 2025. The majority of states do not impose any taxes on these benefits.
2. Can I avoid paying state taxes on Social Security?
Yes, depending on your income level and the exemptions offered by your state, you may qualify for reduced or no taxation.
3. How do I know if my state taxes Social Security?
Check your state’s tax policies or consult your state’s tax department. Alternatively, a financial advisor can help clarify your state’s rules.
4. What are the federal income thresholds for Social Security taxes?
Federal taxes apply to individuals with a combined income above $25,000 or married couples above $32,000. Up to 85% of benefits may be taxed at the federal level.
5. What is combined income?
Combined income is your adjusted gross income (AGI) plus non-taxable interest and half of your Social Security benefits.
