State Taxes on Retirement Income: What to Know
After figuring out your federal tax obligations, you must also consider state taxes. This is where the answer to “Will my Social Security be taxed?” can change dramatically based on your address. State tax laws on retirement income vary widely, creating a patchwork of rules across the country. This is a critical factor for anyone planning a move in retirement.
The states can be grouped into three broad categories based on how they treat Social Security benefits. This is a crucial element of managing your overall retirement taxes.
First are the states with no state income tax at all. These states are often popular retirement destinations for this very reason. If you live in one of these states, you will not pay any state income tax on your Social Security benefits, pension payments, or 401(k) withdrawals. As of 2024, these states are Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming. New Hampshire does not tax earned income but does tax interest and dividends, though this tax is being phased out.
Second is the largest group: states that have an income tax but choose not to tax Social Security benefits. The vast majority of states with an income tax offer a full exemption for Social Security. This means that while your pension or IRA withdrawals might be subject to state tax, your Social Security checks are completely protected. This group includes large states like California, New York, Illinois, Ohio, and Pennsylvania, as well as many others. Living in one of these states provides a significant tax advantage for retirees who rely heavily on Social Security.
Third is the smallest group: the states that do tax Social Security benefits to some extent. As of 2024, only a handful of states fall into this category. These states are Colorado, Connecticut, Kansas, Minnesota, Montana, Nebraska, New Mexico, Rhode Island, Utah, Vermont, and West Virginia. It is very important to note that even in these states, the rules are often different from federal law. Most of them offer their own income-based exemptions, which means that low- and moderate-income seniors may still pay no state tax on their benefits. For example, a state might not tax Social Security for married couples with an AGI below $100,000. The number of states in this category has been shrinking as more state legislatures pass laws to exempt Social Security.
Because state rules can change, it is essential to get up-to-date information. Information on the taxation of Social Security benefits can also be found on the Social Security Administration website. For state-specific tax rules, you must consult your state’s Department of Revenue website.
Choosing where to live in retirement has a major impact on your finances. A state with no income tax or one that fully exempts Social Security can help your retirement savings last longer. Carefully researching the state taxes on Social Security and other retirement income is a critical step in planning for your future.
Disclaimer: This article is for informational purposes only and is not a substitute for professional tax advice. Tax laws are complex and subject to change. Please consult with a qualified tax advisor or CPA for guidance specific to your financial situation.
