Understanding Tax Obligations on Retirement Income: A State-by-State Guide

Retirement income taxation remains one of the most overlooked aspects of retirement planning. For those receiving Social Security benefits, understanding both federal and state tax implications is essential. The taxable portion of retirement income varies significantly depending on your total combined income and where you reside. Let’s break down what every retiree should understand about these tax obligations.

How Federal Tax Applies to Retirement Benefits

Social Security income becomes subject to federal income tax when your combined income exceeds specific thresholds. Combined income is calculated by adding your adjusted gross income (AGI), any nontaxable interest earned, and 50% of your Social Security benefits.

The taxation rules are straightforward but impact your bottom line differently based on filing status:

For single filers: No federal tax applies if combined income stays below $25,000. Income between $25,000 and $34,000 results in 50% of benefits being taxable. Any combined income exceeding $34,000 makes up to 85% of benefits taxable.

For joint filers: The thresholds are higher but follow the same structure. Benefits remain untaxed below $32,000 combined income, 50% becomes taxable between $32,000 and $44,000, and up to 85% becomes taxable above $44,000.

Since 1984, when Social Security first became subject to federal taxation, these income thresholds have never been adjusted for inflation. Meanwhile, benefit payments increase annually through cost-of-living adjustments (COLAs). This means a much larger percentage of beneficiaries face federal tax obligations today compared to four decades ago.

Retirees with tax obligations can either make quarterly estimated tax payments to the IRS or request that their benefits have taxes withheld by submitting Form W-4V to their local Social Security office.

State Taxation of Retirement Income Varies Widely

While 41 states plus Washington D.C. don’t tax Social Security at all, nine states maintain specific tax rules on retirement income. Additionally, 13 states exempt all retirement income—including Social Security, 401(k) distributions, IRAs, and pension payments—from state taxation entirely.

For those in states that do tax Social Security, exemptions and deduction rules differ substantially:

Colorado: Features a 4.4% state tax rate (declining to 4% in 2025). Retirees aged 65+ can deduct all federally taxable Social Security income. Those under 65 can deduct up to $20,000.

Connecticut: With tax rates ranging from 2% to 6.99%, Social Security remains exempt for single filers below $75,000 AGI and joint filers below $100,000 AGI. Higher earners receive partial exemptions, with no more than 25% of benefits subject to tax.

Minnesota: Tax rates span 5.35% to 9.85%. Social Security avoids state taxation for single filers with AGI under $82,190 and joint filers under $105,380. Beyond these thresholds, exemptions phase out at 10% for every $4,000 in excess income.

Montana: Featuring 4.7% to 5.9% tax rates, this state offers only a $5,500 deduction for those 65 and older—one of the more aggressive approaches to taxing retirement income.

New Mexico: With tax rates from 1.7% to 5.9%, benefits remain exempt for single filers earning under $100,000 and joint filers under $150,000 in AGI.

Rhode Island: Tax rates range from 3.75% to 5.99%. Benefits are exempt for single filers below $104,200 AGI and joint filers below $130,250.

Utah: The flat 4.65% rate is offset by tax credits available to single filers with modified AGI below $45,000 and joint filers below $75,000.

Vermont: With graduated rates from 3.35% to 8.75%, benefits remain tax-free for single filers earning less than $50,000 and joint filers under $65,000.

West Virginia: Tax rates span 2.36% to 5.12%. Benefits avoid taxation for single filers with AGI below $50,000 and joint filers below $100,000.

Planning Ahead for Tax on Retirement Income

Understanding your specific tax situation requires careful calculation of your combined income and knowledge of your state’s particular rules. Since thresholds and rates differ substantially across jurisdictions, retirees crossing state lines or with income from multiple sources should review their individual circumstances closely. The tax landscape on retirement income continues to evolve, making regular review of your tax strategy essential for maintaining more of what you’ve earned.