Your monthly Social Security payment is primarily determined by your retirement age and lifetime contributions. However, where you live also plays a significant role in the amount you receive.
While most states don’t tax Social Security benefits, there are nine states that do. These taxation policies can lead to reduced payments for seniors and individuals with disabilities who rely heavily on their Social Security income.
The federal government already taxes benefits for people with individual incomes exceeding $25,000—taxing half of the benefits—and for incomes over $34,000, up to 85 percent of benefits are subject to taxation.
The nine states that tax Social Security benefits are: Colorado, Connecticut, Minnesota, Montana, New Mexico, Rhode Island, Utah, Vermont, and West Virginia. Notably, Missouri, Nebraska, and Kansas have recently eliminated their Social Security taxes thanks to legislative reforms.
Each of the remaining states has its own tax rules, which can vary significantly. For instance, Colorado taxes taxpayers under 65 who report over $20,000 in benefits, but those 65 and older are exempt.
VALERIE MACON/AFP via Getty Images
In Connecticut, Social Security income can be taxed for individuals earning above $75,000, with tax rates ranging from 2 percent to 4.5%, capped at 25 percent of benefits. Minnesota allows a deduction of up to $4,560 from taxable income for residents below an income threshold of $78,000.
Other state tax rates vary, with Montana’s rates between 4.7 percent and 5.9 percent, and Vermont’s between 3.35 percent and 8.75 percent. New Mexico taxes individuals making an adjusted gross income of $100,000 or more, while Rhode Island has penalties for those claiming benefits before reaching full retirement age. Utah has a lower threshold of $45,000 for individual taxpayers.
Many of these states levy Social Security taxes to compensate for lower rates or absence of other taxes, such as state income tax. “For example, states without an income tax often have higher sales taxes,” says Beene. “This can make these areas less appealing for retirees looking for a tax-friendly environment.”