Dealing with the tax burden is one of the major obstacles in planning for retirement. There’s no way to know how healthy your plan is if you don’t know how it will be taxed. It can be a complicated situation. 

When it comes to Social Security, the pesky tax complications vary on a state-by-state basis — 13 states currently tax benefits. Are you planning to retire in one of the states below? For a clue into how your benefits will be impacted, read on. (For related reading, see: State Taxes and Retirement: What You Should Know and Plan For.)

  • Colorado: The Centennial State only taxes Social Security if your income exceeds a certain amount. The tax rate for these benefits is 4.63% and only applies to those younger than age 65 who earn more than $20,000 or those 65 years and older who earn more than $24,000 in benefits.

  • Connecticut: This New England state is equally cold to Social Security benefits. Only married couples filing jointly and earning less than $60,000 in adjusted gross income are exempt from taxes on their Social Security income. Single filers can have an AGI of up to $50,000 and be exempt from taxes. The tax rate ranges from 3% to 6.7%.

  • Kansas: The rate for taxes here ranges from 3% to 6.45%. The Sunflower State exempts those earning $75,000 or less in adjusted gross income.

  • Minnesota: This friendly Midwestern state is not-so-friendly to Social Security. Not only is the tax rate one of the highest at a range of 5.35% to 9.85%, but there is no income exemption from taxation on Social Security benefits. (For related reading, see: Introduction to Social Security and How Are Social Security Benefits Estimated and Taxed?

  • Missouri: The gateway to the West state allows one of the highest AGI exemptions at $100,000 for married couples filing jointly and $85,000 for individuals. The tax rate starts at 1.5% and goes to 6%.

  • Montana: Despite not having any state sales tax, Montana has some of the toughest standards for avoiding taxes on Social Security. The tax rate is between 1% and 6.9% and in general, only couples earning less than $32,000 are exempt from taxation on Social Security.

  • Nebraska: Nebraska follows the federal government in terms of taxing Social Security. Single filers pay taxes if their income exceeds $25,000 and married couples filing jointly pay taxes on their benefits if their income is $32,000 or more. Income tax rates range from 2.46% to 6.84%.

  • New Mexico: People can only exempt up to $8,000 of retirement earnings, depending on their income level. The income tax for New Mexico ranges from 1.7% to 4.9%.

  • North Dakota: North Dakota follows the federal government tax rules for Social Security benefits. The tax rate starts at 1.1% and caps at 2.9%. (For related reading, see: Top Tips for Minimizing Taxes on Social Security and When Do I Stop Paying Social Security Tax?)

  • Rhode Island: The Ocean State also taxes Social Security the same way the federal government does. They do exempt single filers earning up to $80,000 and married couples filing jointly at $100,000. Its income tax rate ranges from 3.75% to 5.99%.

  • Utah: The Great Salt Lake state only has one tax bracket at 5%. It offers a $450 tax credit for single people and $900 for couples filing jointly. Phaseouts for this credit start at $25,000 for single filers and $32,000 for married couples.

  • Vermont: Vermont has the same rules on Social Security benefit taxation as the federal government. Its tax rates range from 3.55% to 8.95%.

  • West Virginia: Those living in West Virginia can only exclude up to $8,000 of retirement income on their taxes, but the rest will be taxed at regular income rates of 3% to 6.5%.

The Bottom Line

While it may surprise many that Social Security benefits are taxed, don't let it derail your tax situation now or when planning for retirement. Talk to your accountant or financial advisor about how to plan ahead so you're not surprised when April 15 rolls around. (For related reading, see: Avoid the Social Security Tax Trap.)

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