How Each State Treats Social Security Benefits for Retirees

State-Specific Retirement | by Jules Buxbaum | Saturday, January 11, 2025

How Each State Treats Social Security Benefits for Retirees can be a puzzling topic for those preparing to stop working. Some retirees assume that if the federal government taxes part of their Social Security income, states will uniformly tax it too.

However, the reality is more complex. In fact, 41 states and the District of Columbia either fully or largely exclude Social Security benefits from taxation, while nine states partially tax them. If you’re curious about how local rules might affect your retirement, you can discover some of the unique tax benefits for retirees in key states.

Federal rules determine how much of your Social Security benefits are subject to federal tax, but states hold the power to add their own layer of taxation—or not. This creates a patchwork of regulations across the country.

Colorado, Connecticut, Kansas, Minnesota, Missouri, Montana, Nebraska, Rhode Island, Utah, and Vermont are often highlighted for partially taxing these benefits. Each uses distinct income thresholds or credits, making your overall tax bill highly state-specific.

Over 80% of U.S. states avoid taxing Social Security benefits. Some states, like Alaska and Florida, have no personal income tax at all.

Others—such as Illinois and Pennsylvania—do have an income tax but exclude Social Security. Many retirees pick these states to preserve more of their benefit checks.

Partial Taxation States: The Nine to Watch

The states that partially tax Social Security benefits typically hinge their taxes on income limits or age-based deductions. Colorado exempts these benefits entirely for individuals 65 or older, but those under 65 may face taxes.

Connecticut uses adjusted gross income (AGI) thresholds: single filers under $75,000 and joint filers under $100,000 owe nothing on their benefits. In Minnesota and Utah, federal formulas often serve as a blueprint, though each state applies its own credits or subtractions.

How Income Thresholds Impact Your Taxes

Many states tie Social Security taxation rules to overall income. That income might include pensions, traditional IRA withdrawals, or even part-time wages.

If your total income rises above a certain number—like $50,000 or $60,000 in some states—you might see part of your Social Security benefits taxed. This creates a “cliff effect,” where surpassing a threshold by just a few hundred dollars can affect your tax bill.

Managing State Tax Liability

State taxes on Social Security typically remain lower than federal taxes, but they still add up. One key tactic is to keep your taxable income from crossing critical thresholds.

This might involve delaying certain retirement distributions, planning Roth conversions at lower tax brackets, or controlling your modified AGI through qualified charitable distributions. For broader ideas that could reduce costs, you might explore ways to minimize taxes on your retirement income.

Real-World Examples of Differing Tax Bills

Imagine a retired couple living in Minnesota with $80,000 in annual income, about half of which comes from Social Security. Because Minnesota partially follows federal guidelines, a portion of their benefits may get taxed.

But if that same couple moved to neighboring Wisconsin—where Social Security isn’t taxed—their annual state tax burden could drop by a few thousand dollars. Such differences can be especially meaningful over two or three decades of retirement.

At 2Pi Financial, we believe retirement planning should factor in both taxes and long-term growth potential. Many individuals keep their portfolios too conservative, risking shortfalls in later years.

We also emphasize that one's risk exposure should match future earnings potential, not just chronological age. If your income prospects remain strong, you can often handle more equity exposure. That principle extends to choosing tax-friendly states too, since lower tax bills can free up room for more strategic investments.

Navigating Potential Future Changes

States revisit their tax laws frequently, and an increasing number have considered cutting Social Security taxes to attract retirees. Nebraska and West Virginia, for example, have already taken steps to phase out or reduce taxation.

Experts anticipate further reforms in the coming years. For more details on emerging proposals, check out potential future changes to Social Security and how reforms may shape the retiree experience.

Additional Moves to Reduce Your Tax Burden

Retirement decisions often hinge on more than one factor. Some retirees focus on property taxes and healthcare costs in addition to income taxes.

Others look into Roth IRA conversions or optimize their timing for pension payouts. If the new location’s overall tax profile is still high, investing in a slightly riskier but historically higher-return portfolio may help offset that cost.

Common Questions About State Tax Rules

Which states don’t tax Social Security at all? As of 2024, 41 states and the District of Columbia either ignore Social Security benefits or specifically exempt them. Some states, such as Florida, go further by having no personal income tax.

What if my income is borderline for taxation? Small changes, like adjusting 401(k) withdrawals, can potentially keep you below your state’s threshold. This might spare you from owing taxes on your Social Security.

Do partial taxation states offer credits? Many do. Utah, for instance, provides a specific Social Security credit that lowers the effective tax rate on recipients with moderate incomes.

How do I handle future rule changes? Keep an eye on legislative updates. Tax reforms that expand or reduce Social Security taxation often pass with transition periods, giving you time to reorganize your assets.

Rethinking the “Glide Path” Myth

Traditional advice says that you should dial down risk as you age. We see it differently: what truly matters is the ratio of your future earning power to current assets.

If you have robust future income potential—maybe from part-time consulting or a pension—your portfolio can handle more volatility. That strategy might also help cover expenses when you live in a state with partial Social Security taxes, letting you maintain a secure retirement over the long haul.

Wrapping Up

State-level taxation of Social Security benefits can significantly affect retirees’ budgets and long-term goals. Knowing whether your Social Security income is taxed, and by how much, is a critical step in choosing where to live and how you structure your investments.

If you’d like to model different scenarios and see how potential tax rules could impact your plan, try our 2Pi Financial Planner. With a data-driven approach, you’ll gain clarity on how state-specific taxes, risk allocations, and future earnings potential fit together.

References

1. Kiplinger. (2024). “States That Tax Social Security in 2024.” Available at: https://www.kiplinger.com/retirement/social-security/603803/states-that-tax-social-security-benefits(https://www.kiplinger.com/retirement/social-security/603803/states-that-tax-social-security-benefits)

2. Money.com. (2024). "Social Security Tax Stats." Available at: https://money.com/social-security-tax-states/(https://money.com/social-security-tax-states/)