Forty-one U.S. states do not tax Social Security benefits. However, nine states still do—each with varying rules based on the recipients’ income levels. Colorado, Connecticut, Minnesota, Montana, New Mexico, Rhode Island, Utah, Vermont, and West Virginia currently impose taxes on Social Security benefits, with varying tax rates.
While several states continue to tax Social Security benefits, they offer exemptions and credits to reduce the tax burden for retirees:
Colorado, Connecticut, and Vermont provide full exemptions from Social Security tax for lower-income retirees, with exemption thresholds up to $100,000. Minnesota and Rhode Island offer partial to full exemptions, depending on income levels, with defined income caps for full exemption eligibility. Montana and New Mexico grant complete exemptions for Social Security income if individual earnings are below $32,000 and $150,000, respectively.
Instead of a full exemption, Utah offers a retirement tax credit, which reduces tax liability based on income, aimed at benefiting lower to middle-income retirees.
States taxing Social Security explained
West Virginia is phasing out its Social Security tax, planning for total elimination by 2026.
Efforts to eliminate federal taxes on Social Security benefits aim to simplify tax obligations for about 40 percent of Social Security recipients. However, critics argue that doing so could drastically reduce federal revenue and accelerate the depletion of Social Security and Medicare trust funds, putting future generations at risk and affecting the economy’s overall health. Shannon Benton, executive director of The Senior Citizens League, said: “Eliminating taxes on Social Security benefits would be an excellent step to provide financial relief to American seniors, many of whom are struggling with a cost of living growing much faster than their incomes.
It would also reduce double taxation, which is inherently unjust.”
Meghna Chakrabarti, host of “On Point” on WBUR, Boston’s NPR news organization, said: “Only about 40% of Social Security recipients pay this tax because they also have other substantial sources of retirement income. The 60% of recipients who rely much more on social security for monthly survival do not pay this federal tax. So getting rid of the tax would increase the overall income of many seniors, but it could also cost the program its future because those taxes go into the Social Security Trust Fund.”
Representative Thomas Massie, a Kentucky Republican, commented: “Although seniors have already paid tax on their Social Security contributions via the payroll tax, they are still required to list these benefits as taxable income on their tax returns.
This is simply a way for the federal government to obtain more revenue at the expense of seniors who have already paid into Social Security.”
As states consider the taxing of Social Security benefits, the differences between those that tax and those that don’t highlight a broader debate on supporting retirees amid rising living costs.
Image Credits: Photo by Kelly Sikkema on Unsplash
