Currently, not taxing the benefits of Social Security is being implemented by an increasing number of states. From 2025 onwards, 41 states in America, along with Washington, D.C., have planned to go this route. The intention is to bring some relief from financial burdens for retirees who are already trapped in high costs pertaining to health care, medications, and other such services.
This, however, is not a case for everyone, as nine states still tax Social Security benefits with the explanation that the revenue generated in this fashion is necessary for financing public services as well as balancing a budget. Detractors would argue that this actually makes the burden heavier for the already heavily burdened senior population, most of whose sole income springs out of the Social Security benefits.
Which States Will Continue to Tax Social Security in 2025?
Although most states do not tax Social Security benefits, these nine states still do. Each state’s policies vary, and some states also offer certain deductions or partial exemptions to reduce the tax impact.
1. Colorado
In Colorado, people age 65 and older can have their Social Security benefits completely deducted from taxable income. However, younger beneficiaries may have to pay a portion of their benefits in taxes.
2. Connecticut
In Connecticut, benefits are taxed if a single person’s household income exceeds $75,000 or a couple’s income exceeds $100,000. Below these thresholds, benefits are not taxed.
3. Minnesota
Benefits are taxed here, but deductions are provided based on income levels to reduce the tax burden.
4. Montana
Montana follows the same criteria as the federal government. If combined income exceeds $25,000 (as an individual) or $32,000 (as a couple), some benefits will be taxed.
5. New Mexico
In New Mexico, benefits are taxed, although deductions depend on the beneficiary’s income and age.
6. Rhode Island
In this state, benefits are taxed if annual income is more than $86,350 (as an individual) or $107,200 (as a couple). If below these limits, benefits are not taxed.
7. Utah
Utah taxes benefits but offers tax credits for low-income retirees that significantly reduce the tax impact.
8. Vermont
Vermont follows the federal model, in which benefits are taxed but partially exempt based on the beneficiary’s income.
9. West Virginia
West Virginia plans to eliminate taxes on Social Security benefits in the next two years to ease the tax burden on retirees.
Why don’t some states also tax the Social Security benefits?
Retirees find some states to be very attractive due to no withholding taxes, with most of these having no state income taxes that make the cost of living cheaper. The objective of the policy is simple: most retirees rely on a fixed income, and every extra tax payment makes it hard for them to render housing or healthcare services. These states include as many tax-based incentives as they might in order to attract such seniors looking for stable economic growth.
Federal Taxes: What You Need to Know
Most states opt not to tax Social Security, but you may have to pay federal taxes on those earnings. If earnings amount to $25,000 in one year or $32,000 or more for couples, further taxation might be levied on benefits. Now some Americans may live in states where the states exempt income tax but still pay taxes at a federal level, depending upon what their total income comes out to be.
Conclusion
By 2025, retirees in the U.S. will have options to make the most of their Social Security benefits without worrying about taxes. However, those who live in the nine states that still tax these benefits should research the exemptions and deductions available to reduce the tax burden.
If you’re thinking of relocating after retirement, don’t focus only on tax policies. Cost of living, access to healthcare, and overall quality of life are also important. Each state has its own advantages and disadvantages, and the final decision will depend on your individual preferences and needs.
FAQs
Q. Which states do not tax Social Security benefits?
A. By 2025, 41 states and Washington D.C. will not tax Social Security benefits.
Q. How many states still tax Social Security benefits?
A. Nine states continue to tax Social Security benefits.
Q. Can I get exemptions on Social Security taxes?
A. Some states offer deductions or partial exemptions based on income levels or age.
Q. Do federal taxes apply to Social Security benefits?
A. Yes, Social Security benefits may be taxed at the federal level if your income exceeds certain thresholds.
Q. Why do some states still tax Social Security benefits?
A. States that tax Social Security often rely on the revenue to fund public services and balance budgets.