• Chris Stein, CFP®

State Taxation of Social Security Benefits

We’ve previously discussed the taxation of Social Security benefits on a federal level, but taxes can vary greatly from state to state when it comes to SS benefits.  Taxation of SS essentially falls into one of 4 categories when it comes to states:

Four Categories

  1. No income tax states where neither SS benefits nor most other income is taxed. Our nearest neighbors in this category would be Wyoming, Texas, South Dakota and Utah.

  2. States that normally tax income, but completely exempt SS benefits from taxation. Many states fall into this category, including California, Arizona, New York, Ohio, Illinois, and many more.

  3. States that tax SS benefits for those people who are subject to federal taxes on those benefits. Essentially these state use the same measures to determine taxability as the federal government does.  North Dakota, Minnesota, Nebraska, West Virginia, Vermont and Rhode Island fall into this category.

  4. Finally, there are some states that use their own determination, separate from the federal government’s method, to determine if any or all your SS benefits are subject to tax. That list with details follows.

Colorado – households meeting certain age requirements are allowed to take a pension exclusion to avoid some, or maybe all state taxes on SS benefits

Connecticut – allows full exemption of taxes on SS benefits if household income below certain dollar amount

Kansas and Missouri – Follows Connecticut method, but with their own dollar limit

Montana – Uses their own worksheet formula to determine taxability, but generally if income is below $35,000 for joint filers, SS benefits are exempt from tax

New Mexico – Follows Colorado method, but with their own limits

Since SS benefits are not adjusted for varying costs of living around the country, the value of your benefit in buying you life’s necessities will vary, in addition to the various taxation methods deployed from state to state.  There is an easy to read map summarizing each state’s approach to taxing SS benefits here:  http://taxfoundation.org/sites/taxfoundation.org/files/docs/state_ssc_tax_large.png

Being aware of the cost of living in certain areas, as well as how your taxes will be affected can play a part in where you may want to consider retiring.  As you can see from the map, it is certainly not an even playing field.

To hear more information on this topic, please use the play button below.

http://s3.amazonaws.com/HelpWithMySocialSecurity.com/HWMSS-02-17-2016.mp3

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