Some retirees are astonished to hear that the federal government taxes Social Security benefits in certain instances. Certain people are even more surprised to learn that some states levy their own income tax on Social Security benefits.
Fortunately, this does not apply to many states. Even those who do pay Social Security frequently provide exemptions or measures to lessen or eliminate the levy, which is usually based on age or income. Here’s a list of states that don’t tax Social Security, as well as some information on the states that do.
States that do not levy a tax on Social Security benefits
Social Security payouts are not taxed in 37 states and the District of Columbia. These nine states include the nine that have no income tax at all, namely:
- New Hampshire is a state in the United States.
- South Dakota is located in the United States.
While investment income is taxed in New Hampshire, wages and Social Security benefits are not.
The remaining 28 states, as well as the District of Columbia, offer various deductions and exemptions to enable taxpayers to avoid paying state-level Social Security taxes. These are the states:
- New Jersey is a state in the United States.
- New York is a city in the United States.
- North Carolina is a state in the United States.
- South Carolina is a state in the United States.
- Washington, D.C. is the capital of the United States.
You won’t have to pay state taxes on your Social Security income if you live in one of these states, or the District of Columbia.
States that have reduced their Social Security taxes based on their residents’ age or income
- North Dakota is a state in North America.
- Rhode Island is a state in the United States.
Specifics vary by state, but all of the states in this category have a Social Security offset based on your age or income. For example, Colorado permits taxpayers 55 and older to deduct a portion of their Social Security income, whereas Kansas offers a 100% exemption to taxpayers earning less than $75,000 regardless of filing status.
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Some Social Security benefits may be taxable in Montana, thus taxpayers are advised to fill out a worksheet to discover whether or not their benefits will be taxed.
West Virginia is on its way to becoming a state
West Virginia has been steadily phasing away its Social Security tax, and by 2022, it will be completely gone. Taxpayers will still be required to pay state income tax on 35 percent of Social Security benefits in 2021.
This is still better than the 2020 tax year when residents were required to pay state income tax on 65 percent of their Social Security payouts.
Recent Changes in Utah
Utah was the only state that taxed Social Security benefits, in the same manner, the federal government did until 2021. Social Security benefits were taxed under the federal government’s system based on a formula that took into account a taxpayer’s filing status and the size of their “combined income,” which was made up of adjusted gross income, nontaxable interest, and half of Social Security benefits.
However, the state subsequently caved in and now employs its own income-based tax credit scheme to offset Social Security income for single filers earning less than $30,000 and married couples earning less than $50,000.