In some states, Americans may see their Social Security benefits compromised due to updated Internal Revenue Service (IRS) guidelines. While Social Security has been a crucial income source for seniors since its inception in 1935, new changes in state taxation laws could impact how much beneficiaries will receive starting in 2025. This article explores which states impose Social Security taxes, how the IRS taxes benefits, and how you can prepare for these changes.
States that Tax Social Security Benefits
Currently, 41 states and Washington, D.C., do not tax Social Security benefits, benefiting over 90% of the nation’s seniors. However, nine states continue to impose taxes on Social Security payments, which could affect residents’ net income. These states are:
- Colorado
- Connecticut
- Minnesota
- Montana
- New Mexico
- Rhode Island
- Utah
- Vermont
- West Virginia
While 2020 saw 13 states levy Social Security taxes, some have since eliminated the tax. Kansas, for instance, removed its Social Security tax in 2024. This highlights the shifting nature of state tax laws on Social Security. States have different policies on Social Security taxation. For example, Colorado allows retirees 65 and older to write off all their Social Security benefits against their state income tax. However, starting in 2025, only individuals earning $75,000 or less will qualify for this benefit, both for single and joint filers.
Minnesota taxes Social Security benefits based on income thresholds. For couples filing jointly, taxes are due if combined income exceeds $105,380. Utah, on the other hand, imposes a flat income tax rate of 4.55% on Social Security benefits.
Federal Taxes on Social Security Benefits
In addition to state taxes, Social Security recipients must be mindful of federal taxes. The IRS uses a formula to determine how much of your Social Security benefits are taxable, based on your total income, including:
- Adjusted gross income (AGI): Total annual income minus Social Security benefits.
- Nontaxable interest: Interest income from non-taxable sources, like municipal bonds.
- Half of your Social Security benefits: The IRS adds 50% of your Social Security income to determine your taxable income.
The IRS then applies tax rates depending on your combined income. For instance, if a single filer has a combined income of $31,000, up to 50% of their Social Security benefits may be taxable. This means they may owe taxes on $15,500 of their Social Security income.
Here’s a breakdown of the IRS’s guidelines for determining how much of your Social Security benefits are taxable:
| Filing Status | Combined Income | % Taxable Social Security Benefits |
|---|---|---|
| Single | $25,000 to $34,000 | Up to 50% |
| Single | More than $34,000 | Up to 85% |
| Married, Filing Jointly | $32,000 to $44,000 | Up to 50% |
| Married, Filing Jointly | More than $44,000 | Up to 85% |
For example, if a person’s combined income is $31,000, the IRS could tax up to 50% of their Social Security benefits ($15,500). At a 12% tax rate, that’s a tax bill of $3,720—significantly lower than paying taxes on the full $15,500.
State-Specific Tax Relief
Some states offer tax relief on Social Security benefits. For instance, Colorado offers a full tax write-off for beneficiaries aged 65 and older, while others, such as New Mexico, have specific thresholds based on income. In the case of states like Minnesota, the taxation is based on a sliding scale, so high-income earners will see a larger portion of their Social Security taxed.
As these state tax laws can change unexpectedly, it’s important to stay informed about current regulations in your state. In some cases, these taxes may be phased out over time, but for those in states where Social Security benefits are still taxed, it’s crucial to plan accordingly.
Conclusion
The tax treatment of Social Security benefits varies widely across states, and IRS guidelines play a key role in determining the taxable portion of your benefits. While 41 states and D.C. offer tax-free Social Security income, nine states impose some form of tax, and other states may make changes to their policies in the future. Keep an eye on both state and federal tax laws to avoid surprises and ensure your retirement income remains protected.
