Retirees collecting Social Security in a shrinking number of states face a decision point as legislatures accelerate the elimination of state-level taxes on those benefits. West Virginia is midway through a three-year phase-out, Colorado has broadened its exemptions twice since 2022, and New Mexico already removed its tax entirely, delivering $84.1 million in first-year relief. The states that still collect some tax on Social Security benefits can now be counted on one hand, and the policy momentum is running in one direction.
Accelerating phase-outs shift the math for retirees
West Virginia offers the clearest example of how quickly the list is contracting. For tax year 2024, the state allows a 35% decreasing modification for filers with federal adjusted gross income above $50,000 for single filers or $100,000 for joint filers. That modification rises to 65% for tax year 2025 and reaches 100% for tax year 2026, at which point the state tax on Social Security benefits effectively disappears. The structured timeline gives residents and tax preparers a clear countdown.
New Mexico moved faster. The state created a full Social Security income exemption beginning with tax year 2022, and the projected first-year tax relief totaled $84.1 million. That figure reflects both the number of beneficiaries in the state and the income levels at which the exemption kicks in, based on filing status thresholds set by the legislature. For retirees who had previously seen a portion of their federal taxable benefits pulled into state calculations, the change is immediate and straightforward: those benefits are simply no longer part of the New Mexico income tax base.
Colorado took a two-step approach. Residents aged 65 and older gained a full subtraction of Social Security benefits from state taxable income for tax years beginning January 1, 2022. Then, through HB24-1142, the state expanded that subtraction to cover filers aged 55 to 64 starting with tax years beginning January 1, 2025, subject to AGI thresholds. The result is that most Colorado residents receiving Social Security will owe nothing on those benefits at the state level, though some higher-income households in the new 55–64 bracket could still see limits based on their overall income.
Vermont and Connecticut remain in the group that still taxes some portion of benefits, though both apply income-based limits. Vermont’s statute establishes a partial exclusion of federally taxable Social Security benefits, with AGI thresholds and phaseout formulas that differ for single filers and married couples filing jointly. Higher-income retirees in Vermont still pay state tax on a portion of their benefits, while lower-income recipients are shielded.
Connecticut uses a similar income-sensitive structure, but it leans on tools rather than formulas in statute for day-to-day guidance. The Department of Revenue Services directs seniors to online tax tips and calculators tied to CT‑1040 filing so they can determine whether their federal taxable Social Security will be fully or partially exempt. For many retirees near the cutoff, small changes in pension income, part-time work, or investment returns can determine whether any benefits remain subject to state tax.
Revenue trade-offs and unanswered questions
The trend raises a practical question: as states drop these taxes, do more retirees file returns claiming the benefit, or does the change simply reduce what existing filers owe? States completing full phase-outs after 2024, like West Virginia, could see measurable shifts in the share of tax returns reporting Social Security income. But no state revenue department in this group has yet published detailed, multi-year data tracing how filer behavior changes as exemptions expand.
In theory, eliminating tax on Social Security can influence several margins at once. Some retirees who previously fell below filing thresholds may begin submitting returns to claim refundable credits or reconcile withholding, now that their income is more lightly taxed. Others may change their residency decisions, choosing to remain in or move to states where benefits are exempt. Still others may adjust how they draw down savings, coordinating IRA withdrawals, part-time wages, and Social Security to stay under income limits where partial exclusions still apply.
For state budgets, the near-term effect is clearer: less revenue from a defined slice of the tax base. New Mexico’s $84.1 million estimate for the first year of its exemption offers a concrete benchmark for the size of the trade-off. West Virginia’s stepwise schedule similarly allows budget writers to map out a predictable decline in receipts as the decreasing modification ramps from 35% to full exclusion.
What remains uncertain is whether these foregone dollars are offset over time by broader economic or demographic gains. Supporters argue that exempting Social Security helps older residents keep up with housing, medical, and caregiving costs, potentially reducing pressure on state-funded services. They also contend that making tax treatment more favorable can attract or retain retirees with other taxable income, partially compensating for the lost revenue on benefits themselves.
Critics, however, point out that blanket exemptions can be expensive relative to more targeted credits aimed at low- and middle-income seniors. In states like Vermont and Connecticut, policymakers have so far favored income-based phaseouts over universal exclusions, betting that a narrower benefit delivers more relief per dollar of forgone revenue. As more states join the ranks of those fully exempting Social Security, the contrast between these models will sharpen.
For retirees, the immediate takeaway is practical rather than theoretical. In the handful of states still taxing benefits, the details now matter more than ever: income thresholds, filing status, and phaseout formulas can significantly change the bottom line. As phase-outs and exemptions continue to spread, the map of where Social Security is taxed is likely to keep shrinking, but the implications for state finances-and for seniors trying to plan around them-will take longer to fully emerge.
