The Social Security payments in the United States are generally subject to federal income tax. The amount of tax you might owe depends on your total income, including your Social Security benefits. They might be also subject to the state’s taxes.
Now, here’s the good news for some enjoying their retirement: not everyone has to pay taxes on their Social Security income. If Social Security is your only source of income, it’s likely that your benefits won’t be taxed. However, if you have other sources of income, like wages or self-employment earnings, a portion of your Social Security benefits may become taxable.
States That Put Taxes on Social Security Payments
The revelation that Social Security benefits might be subject to taxation often catches many individuals off guard. It’s a nuance that demands attention, especially considering that even those with modest incomes may find a portion of their Social Security subjected to the IRS tax gaze.
The key to unlocking this tax conundrum lies in the concept of combined income. This metric combines one-half of your Social Security benefits with your earnings from other sources. The tipping point for taxation occurs when this mixed income surpasses $25,000 for single filers or $32,000 for those married and filing jointly.
As of the 2023 tax year, that just closed its cycle, 11 states tax Social Security benefits: Colorado, Connecticut, Kansas, Minnesota, Missouri, Montana, Nebraska, New Mexico, Rhode Island, Utah, and Vermont. All other states and the District of Columbia do not tax the payments. But, from this list, two states are set to eliminate the states on these benefits.
States Set to Stop Taxing Social Security Payments
Prior to any additional legislative measures taken by its lawmakers, Missouri had already established a relatively permissive framework for overseeing Social Security and state taxes. For the upcoming tax year in 2023, individuals filing as single with incomes of $85,000 or below were exempt from taxes on their benefits. The corresponding threshold for joint filers was set at $100,000.
Nevertheless, the imposition of such taxation levels sparked discontent among political circles. In July, Governor Mike Parson, a Republican, approved Senate Bill 190, enacting a significant change. The stipulations of this legislation expanded the 100% exemption from state income tax on Social Security benefits, applying it universally regardless of income levels.
Scheduled to be implemented for the tax years starting in 2024 and onwards, this adjustment implies that Missouri residents will only need to scrutinize their tax obligations once more when filing their 2023 returns.
Nebraska Will Also Get rid of Social Security Taxes
Nebraska has undergone a series of revisions to its policies regarding the taxation of Social Security income. In May 2021, Legislative Bill 64, passed by the state legislature, initiated a phased repeal of the tax on Social Security income. Initially, the legislation, endorsed by then-Governor Pete Ricketts, a Republican, outlined a gradual reduction of the taxable income by 10% points annually, ultimately vanishing by 2030.
The subsequent year witnessed lawmakers proposing a more accelerated approach to eliminate taxes on Social Security income. This initiative resulted in the introduction of Legislative Bill 873, which doubled the annual decline to 20 percentage points, expediting the complete elimination of the tax by 2025 instead of the initially planned 2030. Ricketts signed this measure into law in April 2022.
Not content with the pace of progress, the Nebraska legislature pursued swifter relief, leading to the enactment of Legislative Bill 754. This bill aimed to advance the full exemption by a year, to be realized in 2024, and gained approval from lawmakers and the current governor, Jim Pillen, a Republican.
As a result, Nebraska residents can now cease the meticulous scrutiny of the current state of Social Security taxation, effective New Year’s Day.