4 Crucial Steps Retirees Must Take If Their State Taxes Social Security Benefits

For millions of retirees, Social Security benefits are the backbone of financial security. While these payments are generally tax-free at the federal level up to a point, retirees with additional income may find 50% to 85% of their Social Security benefits federally taxable.

But that’s not the end of the story. In 2025, nine U.S. states also impose state taxes on Social Security income: Colorado, Connecticut, Minnesota, Montana, New Mexico, Rhode Island, Utah, Vermont, and West Virginia.

If you live in one of these states, there are four key strategies you must consider to protect your retirement income and reduce the tax hit.

1. Know Your State’s Rules

Every state has different taxation laws regarding Social Security. Some states provide exemptions based on income thresholds, while others have flat rules.

• Colorado: Flat 4.4% income tax, but residents over 65 can deduct full Social Security income, while those 55–64 can deduct $20,000.
• Connecticut: No state tax for joint filers with AGI under $100,000 or single filers under $75,000.
• Minnesota, Vermont, and West Virginia: Taxation often follows federal provisional income rules, with phased-out deductions for lower and middle earners.
• Montana, Rhode Island, New Mexico, and Utah: Each has varying deduction limits or credits based on adjusted gross income (AGI).

Tip: The first step is to review your state’s income brackets and exemptions, so you know whether your Social Security benefits will actually be taxed.

2. Understand Provisional Income

The IRS uses “provisional income” to decide how much of your Social Security is taxable federally, and many states adopt the same method.

Provisional income is calculated as:

• Ordinary income (wages, pensions, investments)
• + Tax-free interest (such as municipal bond interest)
• + 50% of Social Security benefits

This means even so-called “tax-free” bond income can push you into a higher tax bracket, making more of your Social Security taxable. Knowing your provisional income level is key to anticipating tax liability at both state and federal levels.

3. Manage Retirement Plan Withdrawals

Once you understand the thresholds, you can strategically control withdrawals from retirement accounts to reduce your taxable income.

• Delay or minimize withdrawals from traditional IRAs or 401(k)s if it keeps you under your state’s taxable threshold.
• Use Roth IRAs strategically, since qualified withdrawals are tax-free and Roths have no required minimum distributions (RMDs).
• If RMDs apply, coordinate withdrawals across different accounts to avoid unexpectedly higher provisional income.

This planning can mean the difference between keeping all of your Social Security tax-free or paying taxes on up to 85% of your benefits.

4. Consider Relocation (If It Makes Sense)

For some retirees, moving to a tax-friendly state may make sense—especially if they were already planning a relocation for retirement.

Currently, 41 states do not tax Social Security benefits, and many also have lower overall income taxes.

However, relocation should be based on more than just Social Security taxation. Consider:

• Property taxes and housing costs
• Healthcare access and expenses
• Cost of living differences
• Family and lifestyle factors

For retirees in high tax brackets, relocating could save thousands of dollars annually, but for moderate earners, state exemptions may already eliminate taxation.

States That Tax Social Security in 2025

State	Tax Approach	Exemptions/Deductions
Colorado	Flat 4.4% tax on income	Full deduction for 65+, $20,000 deduction for ages 55–64
Connecticut	Follows AGI thresholds	Exempt if AGI < $100k (joint) or $75k (single)
Minnesota	Taxes based on federal provisional income	Partial deduction phases out at higher income levels
Montana	Uses federal formula with state modifications	Exemptions apply based on income
New Mexico	Taxed but limited credits available	Lower AGI may qualify for partial exemptions
Rhode Island	Taxes based on AGI thresholds	Some deductions apply for middle-income earners
Utah	Provides retirement tax credit	Phases out at higher incomes
Vermont	Uses federal provisional income formula	Exempt for lower-income households
West Virginia	Follows federal taxable Social Security rules	Phased-out exemptions available

For retirees living in states that tax Social Security benefits, understanding the rules is essential. By knowing your state’s laws, calculating your provisional income, managing retirement withdrawals, and even considering relocation, you can reduce or even eliminate state-level taxation.

Social Security is too important to let taxes erode it. With careful planning, retirees can preserve more of their hard-earned benefits and maintain financial stability in retirement.

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