Another year is coming to an end. That means tax season is right around the corner. This time can be confusing for retired workers and other Social Security recipients. Benefits are taxed at the federal and state level, with different deductions and exemptions depending on your situation.
Read below to learn more about paying taxes on your Social Security benefits.
![Social Security cards and financial documents sitting on $100 billion.](https://g.foolcdn.com/image/?url=https%3A%2F%2Fg.foolcdn.com%2Feditorial%2Fimages%2F757555%2Fsocial-security-8.jpg&op=resize&w=700)
Image source: Getty Images.
Social Security benefits can be taxed by the federal government
Social Security benefits are subject to federal income tax if: total income Exceeds a certain threshold. Total income is defined as the sum of adjusted gross income (AGI) plus tax-free interest and one-half of Social Security benefits.
The table below details the taxable portion of Social Security benefits under various combined income thresholds for single filers and married couples filing jointly.
Taxable portion of benefits |
Total income (single filer) |
Combined income (joint filer) |
---|---|---|
50% |
$25,000 to $34,000 |
$32,000 to $44,000 |
85% |
Over $34,001 |
Over $44,001 |
Data source: Social Security Administration.
Although the total income threshold has never been adjusted for inflation, annual cost of living adjustments (COLAs) have consistently increased Social Security payments over time. As a result, the number of retirees who pay taxes on their benefits has increased dramatically since the law first went into effect in 1984, with benefits likely to earn a hefty 8.7% COLA in 2023. Given that, this trend is likely to continue into the current tax season.
Social Security benefits are taxable in 12 states
Currently, Social Security payments are subject to state income tax in 12 states. But that number will drop to 10 next year as Missouri and Nebraska stop taxing benefits, as detailed in the map below.
![Map of the United States showing states that tax Social Security benefits in 2023.](https://g.foolcdn.com/image/?url=https%3A%2F%2Fg.foolcdn.com%2Feditorial%2Fimages%2F757555%2Fsocial-security-taxes-final.png&op=resize&w=700)
Graph by author.
Some sources on the Internet incorrectly report that West Virginia does not tax Social Security. That’s wrong. West Virginia (along with several other states) recently reduced the tax burden for some beneficiaries by expanding deductions, but these deductions do not apply to individuals whose federal AGI is below a certain level. Applies only to
Below is a brief overview of the state-specific tax rules associated with 2023 Social Security benefits. That means these policies will be relevant to his 2024 tax return.
Colorado: The state tax rate is 4.4%. Taxpayers age 65 and older can deduct all Social Security income for federal taxation, and taxpayers age 55 to 64 can deduct up to $20,000.
Connecticut: State tax rates range from 3% to 6.99%. Benefits are exempt from tax for (1) single filers with a federal AGI of less than $75,000 and (2) joint filers with a federal AGI of less than $100,000. Individuals exceeding these thresholds pay taxes on no more than 25% of their Social Security gross income.
Kansas: State tax rates range from 3.1% to 5.7%. For taxpayers with a federal AGI of $75,000 or less, benefits are tax-free.
Minnesota: State tax rates range from 5.35% to 9.85%. Taxpayers whose total income is below a certain threshold can deduct a portion of their federally taxable benefits from their state income. The maximum deduction is $4,560 for a single filer and $5,840 for a joint filer.
Missouri: State tax rates range from zero to 4.95%. Benefits are exempt from tax for (1) single filers with a federal AGI of less than $85,000 and (2) joint filers with a federal AGI of less than $100,000. Missouri will completely stop taxing benefits in 2024.
Montana: The state tax rate currently ranges from 1% to 6.75%, but next year it will shrink from 4.7% to 5.9%. Montana uses a state-specific formula to determine the taxable portion of benefits. In fact, states sometimes tax Social Security more aggressively than the federal government.
Nebraska: State tax rates range from 2.46% to 6.64%. Benefits are tax-free for (1) single filers with federal AGI up to $45,790 and (2) joint filers with federal AGI up to $61,760. Additionally, Nebraska is currently scheduled to phase out Social Security taxes in 2024, one year earlier than previously scheduled.
New Mexico: State tax rates range from 1.7% to 5.9%. Benefits are exempt from tax for (1) single filers with a federal AGI of less than $100,000 and (2) joint filers with a federal AGI of less than $150,000.
Rhode Island: State tax rates range from 3.75% to 5.99%. Benefits are exempt from tax for (1) single filers with a federal AGI of less than $95,800 and (2) joint filers with a federal AGI of less than $119,750.
Utah: The state tax rate is 4.65%. Benefits are exempt from tax for (1) single filers with an adjusted AGI of less than $45,000 and (2) joint filers with an adjusted AGI of less than $75,000.
Vermont: State tax rates range from 3.35% to 8.75%. Benefits are tax-free for (1) single filers with federal AGI up to $50,000 and (2) joint filers with federal AGI up to $65,000.
West Virginia: State tax rates range from 2.36% to 5.12%. Benefits are exempt from tax for (1) single filers with up to $50,000 of federal AGI and (2) joint filers with up to $100,000 of federal AGI. However, contrary to what some sources report, benefits are actually taxable even above these thresholds.
Some states do not tax retirement income
The map in the previous section shows that 38 states (plus Washington, DC) do not tax Social Security. But some of these states are even more tax-friendly. Specifically, 13 states do not tax retirement income from Social Security, individual retirement accounts (IRAs), or 401(k) plans.