The benefits provided by Social Security are quite important to a significant number of retired people. Depending on the overall income in your household, you could be required to pay taxes on the money you get from Social Security. In addition, the state where you now reside will determine the percentage of your Social Security benefits that must be paid over to the state in the form of taxes when you reach retirement age.

Giving yourself an advantage in retirement by subjecting as little as possible of your Social Security income to taxation is like giving yourself a boost. The Internal Revenue Service may deduct income taxes from your Social Security benefit if your household makes a sufficiently high amount of money each year.

At the state level, there is brighter news about taxes for those receiving Social Security. Your benefits from the Social Security system are no longer subject to taxation in 38 states. It should go without saying that this indicates that there are still 13 states (soon to be 12 states) that will tax the money you receive from Social Security.

States That Tax Social Security Benefits

Minnesota

Income tax on Social Security benefits in Minnesota is calculated under federal law. In states where residents have a tax liability related to their Social Security benefits, a program known as the Social Security Subtraction provides a reduction in that liability. In 2021, a single Minnesota resident will be entitled to subtract from their state income $4,130 in federally taxable benefits. You can deduct up to $5,290 as a married couple. The deduction decreases for those with higher earnings, at $80,270 for joint filers and $62,710 for singles.

Colorado

This state's standard tax rate, including benefit income, is 4.55%. 55-64-year-olds in Colorado can deduct up to $20,000 in retirement income (including Social Security), and 65-plus can deduct up to $24,000. Both spouses can claim the deduction if they have two salaries. After the 2022 tax year, Colorado citizens can deduct all federally taxable Social Security benefits.

Kansans

If your adjusted gross income is $75,000 or less in Kansans, you won't owe any state taxes on your Social Security income. No tax status is exempt from the limit. Over and beyond that amount, benefits are taxed at the same rate as regular income in Kansas (between 3.1% and 5.7%).

Montana

The state of Montana, like the federal government, does not tax Social Security for those with total incomes of less than $25,000 for an individual or $32,000 for a married couple. Benefits for residents with higher incomes are subject to taxation. However, the state calculation of the taxable amount differs from the federal government. The state tax form provides a worksheet to help you determine the difference.

Rhode Island

Rhode Island levies an income tax on Social Security benefits between 3.75 and 5.99%. Full-retirees (those who are 66 or 67 years old, depending on the year they were born) whose adjusted gross income does not exceed $86,350 (single filer) or $107,950 (joint filer) will not have their benefits taxed by the state (married filing jointly).

Vermont

The Vermont legislature raised the income threshold that exempts Social Security benefits from state taxes in 2022. Single filers without an AGI of $50,000 are exempt from paying state income tax on their benefits. Those with annual incomes between $50,000 and $60,000 are excused from paying the full rate.

Connecticut

The income tax rate on Social Security in Connecticut is between 3% and 6.99%. Benefit income received by retirees may be partially or fully tax deductible, depending on their adjusted gross income and filing status. State income tax on benefits is generally not owed by a recipient if their adjusted gross income is less than $75,000 (single filer) or $100,000 (joint filer) (married filing jointly). Even if your Social Security benefit is higher than these amounts, 75% of it will still be tax-free.

Utah

Utah has a 4.95 percent state income tax rate; however, residents can claim a full or partial credit against that amount if they have earned money from other sources. The federal formula determines this rate. Individuals or couples must have an adjusted gross income of $30,000 or less to receive a full tax credit on their benefit income.

West Virginians

Low- and middle-income West Virginians would no longer have to pay state income taxes on their Social Security benefits. The state of West Virginia will not tax 65% of your Social Security benefits for the tax year 2021 if your adjusted gross income is $50,000 or less ($100,000 for married couples filing jointly).

Nebraska

The income tax rate on Social Security in Nebraska is between 2.46 and 6.84 percent. If your adjusted gross income is less than $44,460 or $59,960 and you file jointly as a single filer or married filing, your Social Security benefits will be tax-free.

New Mexico

The tax rate on SSI in New Mexico ranges from 1.7% to 5.9%. New Mexico, like Montana, employs the federal government's poverty guidelines to determine who qualifies for an exemption. Social Security payments are treated the same as other sources of income after a person reaches a certain income level.

Missouri

As for Missouri's Social Security income tax, the rate can go as high as 5.4% but as low as 0%. All your Social Security benefits are tax-free if you're 62 or older and your adjusted gross income is less than $85,000 or $100,000 if you're filing as a married couple. Even those in the highest tax brackets may be eligible for a reduction.

Conclusion:

Understanding whatever taxes the local government levies is important so that you are not caught off guard when your next tax bill arrives, but cheap taxes shouldn't be your only motivation when choosing a long-term residence.

There is a substantial possibility that state taxes on Social Security benefits may reduce your retirement income. If you're planning to retire in one of the 12 states that require it, you'll need to allocate some extra funds.