Tax-Free Retirement: A lot of retired people in the U.S. depend on Social Security for their main source of income. Only nine states will tax these benefits by 2025, which means that most states will not tax them. This article looks at the effects of these tax policies and lists the states where retirees can get the most out of their Social Security income.
Tax-Free Retirement Social Security’s Importance
A significant portion of many Americans’ income, especially that of those 65 and older, comes from Social Security. Approximately 40% of older adults get at least half of their income from Social Security, according to AARP. State tax laws, however, can have a big impact on how much a retiree can keep from their Social Security benefits.
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The Social Security Benefits Tax Environment
Although federal taxes may apply to up to 85% of Social Security benefits, contingent upon an individual’s income, state taxes introduce an additional level of intricacy. Thankfully, the number of states that impose taxes on Social Security benefits is decreasing. Just nine states will still be doing so in 2025:
States That Will Tax Social Security Benefits in 2025
- Colorado
- Connecticut
- Minnesota
- Montana
- New Mexico
- Rhode Island
- Utah
- Vermont
- West Virginia
Notably, West Virginia intends to completely waive its Social Security tax by 2026 and is phasing out its tax over time.
States Exempt From Social Security Income Tax
However, starting in 2025, Social Security benefits will not be taxed in 41 states and Washington, D.C., which will increase their appeal to retirees. Among these states are:
- Alabama
- Alaska
- Arizona
- Arkansas
- California
- Delaware
- Florida
- Georgia
- Hawaii
- Idaho
- Illinois
- Indiana
- Iowa
- Kansas
- Kentucky
- Louisiana
- Maine
- Maryland
- Massachusetts
- Michigan
- Mississippi
- Missouri
- Nebraska
- Nevada
- New Hampshire
- New Jersey
- New York
- North Carolina
- North Dakota
- Ohio
- Oklahoma
- Oregon
- Pennsylvania
- South Carolina
- South Dakota
- Tennessee
- Texas
- Virginia
- Washington
- Wisconsin
- Wyoming
Consequences for Retirees’ Money
People who are retired and live in states that don’t tax Social Security can save a lot of money on taxes. For example, a retiree in a state with a 5% tax rate who gets $30,000 a year in Social Security benefits could save $1,500 a year.
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But tax laws are different in each state. People aged 65 and up in Colorado, for example, can fully deduct from their state taxes the federally taxable parts of their Social Security benefits. This exemption will begin in 2025 and also cover people aged 55 to 64 with an AGI of no more than $75,000 (or $95,000 for married couples filing jointly).
The Effects of Late Adjustments
States like Nebraska and Missouri have chosen not to tax Social Security benefits. This is a sign that tax laws are becoming more favorable for retirees. For instance, the tax exemption is expected to save Missouri retirees a total of $309 million, while Nebraska retirees expect to save about $17 million.
