Seniors in These States May (or May Not) Be Hit With an Unwanted Bill

Many new Social Security recipients are surprised to learn that they must pay federal taxes on their monthly benefits. However, those taxes can be even more of a burden to recipients in the eight states that also tax Social Security benefits.

To help retirees put more money in their bank accounts, there's an effort to end taxes on benefits -- a practice that began only in 1983, when President Ronald Reagan signed into law an amendment that taxed Social Security benefits. Since that time, 42 states have decided not to tax benefits, but eight states have stuck with it.

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These are the states where a Social Security recipient can still be on the hook for both federal and state taxes in retirement. Some pinch more than others.

Colorado

Although the state taxes Social Security benefits, it offers substantial relief for seniors through an age-based deduction that can significantly reduce or eliminate the tax burden, especially for Coloradans with lower to moderate incomes. Taxpayers who are 65 and older can deduct all federally taxed Social Security benefits, while younger retirees receive a smaller tax break.

Connecticut

Not everyone in the Nutmeg state must pay taxes on Social Security benefits. That's because single filers with an adjusted gross income (AGI) below $75,000 and married couples filing jointly with an income below $100,000 are fully exempt from paying. A taxpayer pays only if their AGI exceeds the income threshold, and even then, no more than 25% of their benefits are taxed.

Minnesota

Minnesota taxes Social Security benefits on a sliding scale, based on income. The state provides a partial or full exemption for lower-income retirees. A taxpayer's exemption is reduced by 10% for every $4,000 their income surpasses the state-established threshold (or $2,000 if they're married filing separately).

Montana

Taxpayers 65 and older receive a $5,500 exemption from federal taxable income, which is something, but is not nearly as generous as other states.

New Mexico

Many Social Security recipients in the Land of Enchantment don't pay a cent on benefits because New Mexico provides a higher income threshold than most states. For example, single filers who earn up to $100,000 and joint filers who earn up to $150,000 are off the state tax hook.

Rhode Island

The state has implemented a phased income-based exemption system. Lower-income taxpayers may qualify for full exemptions, while higher-income retirees may have only a portion of their benefits taxed.

Utah

Utah also provides a tax credit for Social Security benefits that can offset much or all of the tax liability for lower- and middle-income recipients. The credit is based on income and filing status.

Vermont

Vermont's taxation of Social Security benefits is similar to that of other states, using an income threshold to determine how much of a retiree's benefits are taxable.

Any time you're considering relocating to minimize expenses, it's good to know where each state stands on the taxation of benefits.

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