Imagine working your entire life, diligently paying into Social Security, only to find out that the government wants another cut when you finally start receiving benefits. It's a frustrating reality for many retirees, and while federal taxes on Social Security are well-known, did you know that some states also tax these benefits? This can significantly impact your retirement income, so let's break down which states are doing this in 2026 and how much it could cost you.
While the federal government already taxes Social Security benefits for those exceeding certain income thresholds, the taxman's reach doesn't end there for everyone. Some states add insult to injury by levying their own income taxes on these benefits. Knowing which states do this is crucial for retirement planning, especially if you're considering relocating. It could mean the difference between a comfortable retirement and constantly pinching pennies.
So, which states are we talking about? Here's a closer look at the states where residents may face extra income taxes on their Social Security income in 2026:
1. Colorado:
Colorado does tax a portion of Social Security benefits, but they offer partial exemptions to soften the blow. Residents aged 55 to 64 can exclude up to $20,000 of their Social Security income from their state taxable income. And this is the part most people miss... Once you hit 65, that exemption bumps up to $24,000, but it applies to all qualifying pension and annuity income, not just Social Security. Colorado uses a flat individual income tax rate, which is 4.4%.
2. Connecticut:
Connecticut offers a more generous approach, but with income limitations. Individual taxpayers with an adjusted gross income (AGI) of $75,000 or less can deduct 100% of their Social Security income from their state taxable income. For married couples filing jointly, that AGI threshold increases to $100,000. But here's where it gets controversial... What about those just above the threshold?
Even if your income exceeds those limits, don't despair! You still get a partial exemption. The state taxation of Social Security benefits can't exceed 25% of the benefits you receive. Connecticut's income tax rates range from 2% to 6.99%.
3. Minnesota:
Minnesota also allows residents to deduct at least a portion of their Social Security payments from their state taxable income. The amount you can deduct depends on your income.
For single taxpayers, if you earn $84,490 or less, you're fully exempt from state Social Security taxes. For married couples filing jointly, Social Security benefits are fully state-tax-exempt if your combined income is $108,320 or less. Those earning more than these amounts will likely pay some state taxes on their Social Security income. Minnesota's income taxes are progressive, ranging from 5.35% to 9.85%.
4. Montana:
Montana imposes a 5.65% income tax on earnings above specific thresholds: $95,000 for joint filers and $47,500 for single filers. Taxpayers age 65 and older are limited to a $5,500 subtraction from their federal taxable income. It's worth noting that several deductions that once benefited older residents, including a partial interest income deduction, have been eliminated in recent years. This can make Montana less attractive for some retirees, especially those relying heavily on fixed income.
5. New Mexico:
New Mexico offers a significant exemption for most retirees. Since 2022, single seniors with less than $100,000 in income and married couples filing jointly with less than $150,000 in income haven't had their Social Security benefits subjected to state income tax. It's a relatively high threshold, meaning most retirees in New Mexico avoid this tax. However, those with income above these thresholds must pay state taxes on their Social Security benefits. New Mexico's income taxes range from 1.7% to 5.9%.
6. Rhode Island:
Rhode Island also provides income-based exemptions. For married couples filing jointly, state taxes on Social Security benefits apply only when their adjusted gross income reaches $133,750 or higher. For most other filing statuses, retirees generally owe state tax on their Social Security income only if their federal AGI is $107,000 or above. Rhode Island's income taxes range from 3.75% to 5.99%.
7. Utah:
Utah offers a $450 retirement tax credit. However, there's a catch: you can't claim this credit if you also claim the Social Security benefits credit or the Military Retirement credit. This means you have to choose which credit benefits you the most. Utah applies a flat income tax rate of 4.5% to all taxable income.
8. Vermont:
Vermont doesn't tax Social Security benefits for all retirees. Instead, they offer a full exemption for Social Security income to retirees who fall below certain income limits. For the 2026 tax year, married couples filing jointly owe no state tax on their benefits if their AGI is $70,000 or less. Single filers and those married filing separately qualify for a full exemption with an AGI of $55,000 or below. A partial exemption is available for single filers with AGI up to $64,999 and for joint filers with AGI up to $79,999. This tiered system aims to provide the most relief to those with the lowest incomes.
The Bottom Line:
Federal and state taxes on Social Security benefits can significantly impact your budget during retirement. It's essential to factor these taxes into your retirement planning. If you're considering relocating, be sure to research the state's tax laws regarding Social Security benefits. A lower cost of living can quickly be offset by higher taxes.
For those seeking a more comfortable financial situation, exploring ways to supplement your Social Security income, such as taking on a part-time job or developing a side hustle, can provide financial breathing room and reduce the sting of taxes.
Do you think states should be taxing Social Security benefits at all? Or should these funds be considered off-limits, given that retirees have already paid into the system for decades? What are your thoughts? Share them in the comments below!
