2024 Guide to States That Tax Social Security Benefits and How to Minimize Taxes

Social Security benefits are essential for many people, especially retirees and those with disabilities. They help provide financial support in the later years of life or during periods of hardship. However, not everyone receives the same treatment when it comes to taxes on these benefits. While the federal government may tax some Social Security benefits, certain states have their own tax rules. In 2024, only a few states tax Social Security benefits, and each has different rules on how much is taxed and who qualifies. This article will provide an overview of which states tax Social Security benefits and offer some tips on how to minimize or avoid these taxes.

Federal Taxation of Social Security Benefits

Before we look at state taxes, it’s important to understand how Social Security benefits are taxed at the federal level. Since 1983, the federal government has taxed Social Security benefits based on your combined income, which includes:

• Your Adjusted Gross Income (AGI)
• Any nontaxable interest
• 50% of your Social Security benefits

The amount of tax you pay depends on your total income. Here’s a simple breakdown:

• Individuals earning over $25,000 or couples earning over $32,000 will pay taxes on up to 85% of their Social Security benefits.

For many people, this means some or all of their Social Security benefits could be taxed by the federal government.

States That Tax Social Security Benefits in 2024

As of 2024, nine U.S. states impose taxes on Social Security benefits. However, each state has different rules about how much income is taxed and whether any exemptions apply. Here’s a list of those states and a summary of their tax policies:

1. Colorado

• Tax Policy: Social Security benefits are taxable for people under 65.
• Exemptions: Up to $20,000 for those aged 55-64, and up to $24,000 for those 65 and older.
• Tax Rate: Flat 4.4%.
• Exemption for high earners: Exempt for incomes under $75,000 (single) or $95,000 (married) starting in 2025.

2. Connecticut

• Tax Policy: Social Security benefits are taxed between 3% to 6.99%.
• Exemptions: Exempt for incomes under $75,000 (single) or $100,000 (married). 75% of benefits are exempt if income exceeds these thresholds.

3. Minnesota

• Tax Policy: Follows federal income tax thresholds.
• Tax Rates: Range from 5.35% to 9.85%, depending on income.
• Exemptions: Partial deductions through a Social Security Subtraction.

4. Montana

• Tax Policy: Social Security benefits are taxed at graduated rates.
• Tax Rates: Between 4.7% to 5.9% for incomes exceeding federal thresholds.

5. New Mexico

• Tax Policy: Taxes Social Security benefits from 1.7% to 5.9%.
• Exemptions: Benefits are exempt for individuals earning under $100,000 and married couples earning under $150,000 from 2024 onward.

6. Rhode Island

• Tax Policy: Social Security benefits are taxed at rates between 3.75% and 5.99%.
• Exemptions: Exempt for incomes under $101,000 (single) or $126,250 (married). Partial exemptions apply for incomes above these thresholds.

7. Utah

• Tax Policy: Flat tax rate of 4.55%.
• Exemptions: Full exemption for incomes below $45,000 (single) or $75,000 (married). Partial exemptions apply above these limits.

8. Vermont

• Tax Policy: Taxes Social Security benefits at rates between 3.35% and 8.75%.
• Exemptions: Full exemption for individuals earning below $50,000 and married couples earning below $65,000. Partial exemptions for higher incomes up to certain limits.

9. West Virginia

• Tax Policy: Specific tax rules for Social Security benefits, depending on the recipient’s income.

States Without Social Security Taxes

If you’re looking for a state that does not tax your Social Security benefits, you have many options. A total of 41 states and the District of Columbia do not impose any tax on Social Security benefits. States like Texas, Florida, and Nevada are particularly popular among retirees because they don’t have state income taxes at all. These states could be a good choice if you’re looking to reduce your tax burden in retirement.

Factors to Consider for Retirees

While avoiding taxes on Social Security benefits might seem appealing, it’s important to think about other factors when choosing where to retire. For example:

• Cost of Living: States that don’t tax Social Security may have a higher cost of living, including expensive housing and healthcare.
• Overall Tax Burden: Even in states that don’t tax Social Security benefits, there may be higher property taxes, sales taxes, or other forms of taxation.
• Access to Services: States with higher taxes might offer better public services, such as healthcare, senior programs, or public safety.

How to Avoid Paying Taxes on Social Security Benefits

There are a few strategies you can use to minimize or avoid paying taxes on your Social Security benefits:

1. Keep Your Income Low: If your total income is below $25,000 for individuals or $32,000 for couples, your Social Security benefits will likely not be taxed by the federal government.
2. Manage Retirement Account Withdrawals: Be strategic about when and how much you withdraw from retirement accounts like IRAs and 401(k)s, as these withdrawals can increase your taxable income.
3. Relocate to a State Without Social Security Taxes: If your primary goal is to avoid Social Security taxes, consider moving to a state that doesn’t tax your benefits.

Conclusion

In 2024, nine U.S. states tax Social Security benefits, and each state has different income thresholds and exemptions. If you live in one of these states, it’s important to be aware of your tax obligations. On the other hand, many states do not tax Social Security, which may be an attractive option for retirees. However, when deciding where to retire, it’s essential to also consider other factors like the cost of living and overall tax burden. In the end, finding the right state for you depends on balancing tax policies with other important aspects of your retirement plans.

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