Social Security is a vital source of income for millions of Americans, whether they are retired or living with a disability. For many households, these payments cover most of their monthly expenses. But if you live in certain states, your Social Security benefits might not stretch as far as expected because some states tax them on top of federal rules.
Knowing which states apply these taxes and how federal income thresholds work can help you plan ahead. By understanding how to time your benefits, manage your income, and prepare for healthcare and other expenses, you can protect more of your retirement income.
How Taxes Can Reduce Your Social Security
Social Security is supported by payroll taxes and is designed to help people 65 and older, as well as those with disabilities. However, part of your benefit might be taxable depending on your income. The IRS uses a “combined income” formula that adds your adjusted gross income, any nontaxable interest, and half of your Social Security payments.
For individuals:
- If your combined income is $25,000 or less, you pay no federal tax on your benefits.
- Between $25,000 and $34,000, up to 50% of your benefits may be taxed.
- Over $34,000, as much as 85% may be taxable.
For married couples filing jointly:
- Below $32,000, benefits are tax‑free.
- Between $32,000 and $44,000, up to 50% may be taxed.
- Above $44,000, up to 85% could be taxed.
The Nine States That Tax Social Security
While most states leave Social Security alone, nine states apply their own taxes. These are:
- Colorado – People under 65 can deduct up to $20,000 of benefits; those over 65 are generally exempt.
- Connecticut – Taxes may apply to up to 25% of your benefits, depending on income.
- Minnesota – Certain exemptions exist, but higher incomes can lead to partial or full taxation.
- Montana – Taxes benefits included in your federal income, with deductions for some retirees over 65.
- New Mexico – Uses income thresholds to decide taxation.
- Rhode Island – Applies taxes based on income levels and age.
- Utah – Uses adjusted gross income limits for taxation.
- Vermont – Phases in taxes depending on your earnings.
- West Virginia – Recently changed rules but still applies certain income-based taxes.
Living in one of these states can reduce your take‑home amount, so factor this in if you are planning to retire there or considering a move.
Tips to Maximize Your Social Security
The age at which you start collecting benefits can make a big difference. Starting at 62 will lower your monthly amount, while waiting until 70 can increase it by about 8% for each year you delay.
If you work while receiving benefits before reaching full retirement age, earning over the annual limit can temporarily reduce your checks. Once you reach full retirement age, you can earn as much as you like without affecting your payments.
Plan Beyond Just Social Security
Social Security should be one part of your overall plan. Budget carefully for healthcare, as Medicare does not cover all costs. Consider using a Health Savings Account to build a cushion for medical expenses. Paying off high‑interest debt before retiring will also help you make better use of your monthly income.
Looking Ahead
Experts warn that the Social Security trust funds may be under strain by 2034, which could lead to reduced payments in the future unless changes are made. Possible solutions include higher payroll taxes or adjusting the retirement age. While planning for finances is essential, remember to focus on the personal side of retirement as well. Stay involved with friends, hobbies, and meaningful activities to enjoy a more fulfilling life after leaving the workforce.
