Retirement planning involves numerous considerations and one of such is social security which is important to you and others with taxation of Social Security benefits being critical. While the federal government may tax some of your benefits depending on your income, most states do not now tax Social Security. Let us get into where states provide this exemption. What does this mean for you?
States that do not tax social security benefits
For now, it is only 41 states along with Washington D.C., that does not collect tax for your social security benefits. This means that if you live in any of these states, your Social Security income is exempted from state taxation. Here’s the full lists of states included:
- 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
Another thing you need to know is that some states have recently changed their tax policies. For instance, Missouri, Nebraska, and Kansas have removed their taxes on Social Security benefits in 2024.
States that tax social security benefits
Currently, nine states tax Social Security benefits:
- Colorado
- Connecticut
- Minnesota
- Montana
- New Mexico
- Rhode Island
- Utah
- Vermont
- West Virginia
However, the extent of taxation is different depending on your state. Some states offer exemptions or deductions based on your income thresholds or age. For example, West Virginia is in the process of phasing out tax on Social Security benefits and aims to eliminate these taxes entirely by 2026.
How federal taxes affect your social security benefits
Regardless of state policies, the federal government may tax a portion of your Social Security benefits if your combined income exceeds certain thresholds. Combined income includes your adjusted gross income, nontaxable interest, and half of your Social Security benefits. Depending on your filing status and income level, up to 85% of your benefits could be subject to federal taxation.
Considering relocation for tax purposes
If you intend to move to a state that does not pay social security, you need to look at the bigger picture. While avoidance of state tax on such benefits may seem good, other elements like property taxes, sales taxes, and the general cost of living weigh substantially on your financial well-being especially during your retirement. States like Texas and Florida do not tax Social Security benefits, yet they may be higher on property taxes or living costs.
Key Takeaways
There are forty-one states and Washington, D.C., with no taxation on Social Security benefits.
- Nine states are tax social security benefits, though their policies differ from one another.
- Federal taxes on your Social Security benefits are based on your combined income.
- When you want to relocate, you have to weigh the cost of all the taxes.
Understanding these nuances will assist you in making informed decision to maximize your retirement income.
