Elderly Residents in These Nine States Face Potential Reduction of Social Security Payments
In the United States, Social Security benefits serve as a significant source of income for many retirees, with six in ten retirees considering it a major source. However, understanding the tax implications of these benefits can be complex, as both federal and state governments levy taxes on Social Security income in various ways.
At the federal level, the Internal Revenue Service (IRS) determines taxable Social Security benefits based on "combined income." This term refers to the sum of half of Social Security income, adjusted gross income (AGI), and any untaxed interest income. If combined income exceeds certain thresholds, up to 85% of Social Security benefits could be taxable.
Several states also tax Social Security benefits, albeit to varying degrees. Nine states still tax a portion of residents' Social Security benefits, each with its own unique policies and thresholds.
## State-by-State Social Security Tax Policies
### Colorado Residents aged 65 or older with federally taxed Social Security can deduct all benefits. For those aged 55 to 64, a full deduction is available if AGI is below $75,000 (single) or $95,000 (joint). Otherwise, a $20,000 deduction applies. Colorado levies a flat 4.4% tax on taxable income.
### Connecticut Connecticut exempts taxpayers with an AGI below $75,000 (single) or $100,000 (joint) from Social Security taxes. Taxable benefits are limited to 25% of the total received for those with higher AGIs, with tax rates ranging from 4.5% to 6.99%.
### Minnesota Minnesota taxes Social Security using a sliding exemption based on income, with limits rising with inflation.
### Montana Montana follows the federal tax formula with no special state adjustments.
### New Mexico New Mexico offers a full exemption for single filers earning less than $100,000 and joint filers under $150,000. Thresholds are under review for potential changes.
### Rhode Island Rhode Island exempts Social Security once full retirement age is reached, provided income is below $104,200 for single filers or $130,250 for joint filers. Thresholds are indexed to inflation.
### Utah Utah offers credits for Social Security benefits, but these phase out above $45,000 (single) or $75,000 (joint). Credit amounts rise modestly with inflation.
### Vermont Vermont offers a full exemption for single filers earning less than $50,000 and joint filers under $65,000. Partial taxation applies up to $60,000 for single filers and $75,000 for joint filers. Lawmakers are debating a full repeal.
### West Virginia West Virginia is phasing out Social Security taxation by 2026, with a further 35% reduction in taxation in 2025.
## Federal Taxation of Social Security Benefits
Every American is subject to potential federal taxes on Social Security income. The thresholds for combined income are relatively low, and more retirees are facing federal Social Security taxes each year.
## Key Considerations
The Social Security Fairness Act of 2025, which repealed the Windfall Elimination Provision (WEP) and Government Pension Offset (GPO), may increase benefits but also potentially push recipients into higher tax brackets. Additionally, the 2025 Cost-of-Living Adjustment (COLA) of 2.5% may increase the taxable portion of benefits by raising total income.
It's essential for retirees to understand the tax implications of their Social Security benefits to make informed decisions about their financial planning. Consulting a tax professional or financial advisor can help navigate these complexities and ensure optimal financial management.
- In Colorado, retirees aged 65 or older with federally taxed Social Security can deduct all benefits, while those aged 55 to 64 can still deduct their benefits if their AGI is below $75,000 (single) or $95,000 (joint). Otherwise, a partial deduction applies.
- At the federal level, every American is subject to potential taxes on Social Security income, as the thresholds for combined income are relatively low, and more retirees are facing federal Social Security taxes each year.
