For millions of Americans, Social Security isn’t just a monthly check—it’s the main source of income during retirement or while living with a disability. But depending on where you live, your Social Security benefits might not go as far as you expect.
While federal taxes already apply to Social Security in certain situations, nine states also tax Social Security benefits, further reducing what ends up in your pocket. If you’re living in one of these states—or planning to move to one—it’s worth understanding how your location could affect your retirement income.
How Taxes Affect Your Social Security Income
Social Security is designed to provide financial support primarily for retirees and disabled individuals. It’s funded by payroll taxes, but when it’s time to collect benefits, part of that income may be taxed—both federally and at the state level.
Federal Tax Rules
The IRS uses a formula called “combined income” to determine how much of your Social Security benefits are taxable. Combined income includes:
- Your adjusted gross income (AGI)
- Any non-taxable interest (like municipal bond income)
- Half of your Social Security benefits
Here’s how it breaks down:
For individuals:
- Up to $25,000 → No tax on benefits
- $25,000–$34,000 → Up to 50% of benefits may be taxed
- Above $34,000 → Up to 85% of benefits could be taxed
For couples filing jointly:
- Up to $32,000 → No tax
- $32,000–$44,000 → Up to 50% may be taxable
- Above $44,000 → Up to 85% may be taxed
These 9 States Also Tax Social Security Benefits
Most states don’t tax Social Security, but nine states still do—and the rules vary widely. Here’s the list:
Colorado, Connecticut, Minnesota, Montana, New Mexico, Rhode Island, Utah, Vermont, and West Virginia
Let’s take a quick look at how some of these states apply taxes:
- Colorado: Residents under 65 can deduct up to $20,000 of taxable benefits. Over 65? You may be fully exempt.
- Connecticut: Up to 25% of your benefits may be taxed, depending on your income.
- Minnesota: Offers limited exemptions, but many retirees still pay partial or full taxes based on income.
- Montana: If your benefits are taxable at the federal level, Montana will likely tax them too—but deductions apply after age 65.
- New Mexico, Utah, Rhode Island, Vermont, West Virginia: Each state uses its own income thresholds and rules, usually based on AGI.
Why this matters: If you live in—or move to—one of these states, your monthly Social Security income could be lower than expected due to state-level taxation.
Maximize Your Social Security: What You Can Do
It’s not just where you live—it’s also when and how you claim benefits that makes a big difference.
Delay Claiming (If You Can)
You can start collecting benefits at age 62, but doing so reduces your monthly payout. For every year you delay (up to age 70), your benefit increases—by roughly 8% annually. If your budget allows, this can result in much higher lifetime benefits.
Be Aware of the Earnings Limit
If you collect Social Security before reaching your full retirement age and continue working, earning too much can temporarily reduce your benefits. But after full retirement age, you can earn as much as you want without penalties.
Retirement Planning Beyond Social Security
Social Security isn’t designed to cover all your expenses. Make sure your retirement plan includes:
- Healthcare planning: Medicare doesn’t cover everything. Consider a Health Savings Account (HSA) while you’re still working.
- Paying off debt: Eliminate high-interest loans before retirement to improve cash flow.
- Budgeting for essentials: Include rising costs of living, long-term care, and housing in your retirement budget.
The Uncertain Future of Social Security
There’s growing concern about Social Security’s long-term sustainability. Current estimates suggest that the trust fund could be depleted by 2034, which may result in benefit reductions of 19% to 23% unless Congress takes action.
Possible solutions include:
- Raising payroll taxes
- Increasing the retirement age
- Reducing future benefit levels
Public opinion polls show that most Americans would rather pay more in taxes than receive lower benefits, but any policy change will take time—and politics.
Retirement Isn’t Just Financial—It’s Emotional Too
Don’t overlook the emotional side of retirement. Many retirees miss the structure, social connections, and sense of purpose that work provided. Stay mentally and socially active by:
- Volunteering
- Picking up a hobby
- Joining clubs or social groups
- Staying in touch with friends and family
If you’re counting on Social Security as a major source of income, where you live could impact how much you receive. These nine states may tax your benefits, so it’s smart to plan ahead—especially if you’re thinking about relocating. In addition to understanding the tax rules, timing your benefits strategically, managing your healthcare costs, and staying socially connected can help make your retirement more secure and fulfilling.
