In 2025, Two States Plan to Impose Lower Taxes on Social Security Benefits
In 2025, Two States Plan to Impose Lower Taxes on Social Security Benefits
The anticipated average Social Security payout for retired workers in 2025 is roughly $1,976 per month, which equates to around $24,000 annually. However, many retirees won't retain this entire amount. Firstly, Senior citizens utilizing Medicare typically have their Part B premiums taken directly from their Social Security payments. Secondly, certain retirees with income surpassing particular thresholds are subject to federal Social Security benefit taxes.
Moreover, certain states also impose taxes on Social Security benefits. Nevertheless, this practice is gradually fading out. In 2025, citizens of the following two states will be liable for reduced income taxes on their Social Security benefits, thereby potentially extending their personal savings slightly.
1. Colorado
Colorado has already implemented a law that permits individuals over 65 to deduct their Social Security benefits from their state taxable income. This provision is valid for personal filers with an adjusted gross income (AGI) of $75,000 or less and for married couples filing jointly with an AGI of $95,000.
Although beneficial for numerous seniors, the rule does not apply to retirees receiving Social Security benefits before the age of 65 or those collecting disability or survivor benefits in this age group.
From 2025, Colorado will expand this existing law to include all individuals aged 55 and above. However, the AGI limits continue to apply. It's essential to note that at the federal level, non-taxable Social Security benefits are not exempt from state income taxes. Therefore, some Coloradans might still be liable for some state taxes on their benefits.
2. West Virginia
West Virginia made Social Security benefits exempt from state income tax for individuals with federal AGIs of $50,000 or less and married couples filing jointly with AGIs of $100,000 or less beginning in 2022. West Virginia aims to broaden this law further, allowing a larger number of residents to save more of their Social Security benefits.
The transition takes place over several years. Starting from 2024, residents with AGIs exceeding the aforementioned thresholds could exclude 35% of their Social Security benefits from their state income taxes. The percentage will increase to 65% in 2025, and by 2026 and beyond, West Virginians will not owe any state Social Security benefit taxes.
Which other states tax Social Security benefits?
Aside from Colorado and West Virginia, several other states will tax the Social Security benefits of some of their retirees in 2025:
- Connecticut
- Minnesota
- Montana
- New Mexico
- Rhode Island
- Utah
- Vermont
Residing in one of these states does not automatically mean you'll owe state taxes on your checks. Each state has unique rules to determine who might be liable for income taxes on their Social Security benefits, with many exempting individuals below certain income limits (similar to the examples given).
If you're concerned about paying state Social Security benefit taxes in 2025, look up your state department of taxation or consult with an accountant to learn how they calculate these taxes. It's advisable to save money for these taxes in advance to avoid any surprises.
In 2025, retirees living in states like Connecticut, Minnesota, Montana, New Mexico, Rhode Island, Utah, and Vermont may still need to pay state taxes on their Social Security benefits, despite these funds being exempt at the federal level. The eligibility and amount of taxes vary by state, so it's crucial to review your specific state's rules or consult with a tax professional to understand your potential liability.
Storing funds in advance may help retirees cover any unexpected state Social Security benefit taxes in 2025, avoiding potential financial surprises in their retirement planning.