Retirees in most of the country collect Social Security without owing a dime in state income tax on those benefits. But residents of a shrinking group of states still face a state-level bite on the same retirement income that the federal government already taxes. As several of those states phase out the practice, the remaining holdouts create real financial differences for older Americans deciding where to live and how to plan their tax filings for 2025 and beyond.
Why state taxation of Social Security hits harder right now
The federal government taxes Social Security benefits based on a formula called “combined income,” which adds adjusted gross income, nontaxable interest, and half of the recipient’s benefits. The Social Security Administration defines fixed thresholds at which up to 50 percent or 85 percent of benefits become taxable at the federal level. These thresholds are not indexed to inflation, so ordinary cost-of-living increases can gradually push more of a retiree’s benefits into the taxable column even if their standard of living has not changed.
States that tax benefits typically start from the portion that is taxable federally. In other words, they look to the amount of Social Security income included on the federal return and then apply their own rules to determine how much of that figure is subject to state income tax. Because the Internal Revenue Service already treats part of Social Security as ordinary income, any state liability is layered directly on top of what the IRS collects, compounding the impact on retirees’ budgets.
That layering effect matters because benefit amounts rise each year with cost-of-living adjustments. When benefits increase, so does the federally taxable portion for many households, and any state that keys its own tax to that figure automatically collects more. For retirees on fixed budgets, the compounding effect can mean hundreds of extra dollars owed each spring, with no additional income to show for it after inflation. The same dynamic can affect people receiving disability benefits, since the IRS applies similar rules when determining how much of Social Security disability income is taxable, as outlined in its guidance on regular disability benefits.
The hypothesis that states retaining partial taxation of Social Security will see slower growth in their over-65 populations compared with neighboring states that exempt benefits is plausible but unproven. No official state data release currently tracks whether retirees relocate specifically because of this tax difference, and cost-of-living variables make clean comparisons difficult. Housing costs, property taxes, health care access, and family ties all weigh heavily on relocation decisions and can easily overshadow a few hundred dollars of annual income tax.
What is clear is that legislatures in several of these states have treated the tax as a political liability worth eliminating. In recent years, a number of states have either fully exempted Social Security benefits from income tax or expanded existing exemptions, often framing the changes as a way to support seniors facing higher prices and uncertain markets. The remaining states now stand out more sharply, and lawmakers there face ongoing pressure from retiree groups and advocacy organizations to follow suit.
How each remaining state handles the tax differently
The states that still tax Social Security benefits do not all apply the same rules. Montana includes taxable Social Security income in state taxable income to the extent it appears on the federal return, according to the Montana Department of Revenue. That direct pass-through means Montana residents with higher combined income pay state tax on up to 85 percent of their benefits, mirroring federal exposure and leaving little room for state-level relief beyond broader rate cuts or credits.
Minnesota, by contrast, uses a subtraction mechanism that reduces the taxable amount for qualifying filers. Analysis from the Minnesota House research staff explains that the state allows taxpayers to subtract a portion of their Social Security income from federal taxable income when computing Minnesota tax, subject to income-based phaseouts. Over time, lawmakers have adjusted both the size of that subtraction and the income thresholds, reflecting ongoing debate about whether to move toward a full exemption or preserve some degree of progressivity.
Colorado applies age-based rules to its Social Security subtraction, according to the Colorado Department of Revenue. Retirees above a certain age can subtract more retirement income-including Social Security-from their federal taxable income when calculating Colorado tax, while younger beneficiaries often receive a smaller break. This structure aims to target relief toward older residents but can create year-to-year jumps in tax liability as taxpayers cross key age thresholds.
Rhode Island requires filers to complete a Social Security Modification Worksheet and an additional schedule to calculate their adjustment, as shown in materials from the Rhode Island Division of Taxation. The state offers an income-limited exemption that shields some or all benefits for lower- and middle-income retirees while continuing to tax a portion of benefits for higher-income households. The paperwork can be more involved than in states that simply exempt benefits entirely, and small changes in income may cause some retirees to lose part of their exemption from one year to the next.
These differences underscore why retirees cannot assume that “taxable federally” means the same thing as “taxable by my state.” In some jurisdictions, federal taxation is effectively the ceiling, with state law providing only additional subtractions. In others, state rules track federal treatment closely and offer little extra relief. For people planning a move or projecting their 2025 and 2026 tax bills, the details of each state’s formula-income thresholds, age cutoffs, and phaseout ranges-can significantly change the bottom line.
Financial planners often encourage clients to look beyond headline state income tax rates and examine how each state treats Social Security, pensions, and withdrawals from retirement accounts together. A state that taxes benefits but has modest property taxes and lower housing costs might still be more affordable than a state with no tax on Social Security but higher overall expenses. As more legislatures revisit their policies, retirees will need to watch not only whether a state taxes Social Security at all, but also how quickly new exemptions phase in and whether they apply to their specific income level.
