When you plan your retirement budget, taxes are an essential part of the equation. You'll pay ordinary income taxes on withdrawals from non-Roth retirement accounts. Plus, if your income exceeds certain thresholds, part of your Social Security is taxable at the federal level.
But your tax bill could creep even higher depending on the state you choose to live in during retirement. That's because some states tax your Social Security benefits.
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How bad are state taxes on Social Security?
Even if you live in a state where some Social Security is taxable, that doesn't necessarily mean you'll owe taxes on your benefit. Many states shield Social Security from taxation for recipients who earn less than a certain amount or offer credits to offset the tax.
In Colorado, for instance, singles with an income of less than $75,000 and married couples with joint incomes below $100,000 won't owe state taxes on their Social Security. Utah gives singles with an income of $45,000 or less and married couples with joint incomes of $75,000 or less a full tax credit for their benefit income.
Also, while 38 states currently don't tax Social Security benefits, that number will soon be 40. That's because Missouri and Nebraska are eliminating state Social Security taxes. In Missouri, Social Security benefits will no longer be taxable beginning in 2024 because of legislation Gov. Mike Parson signed into law earlier this month. The Nebraska legislature approved a law in 2022 that's phasing out state Social Security taxes and eliminate them altogether in 2025.
The 38 states that don't tax Social Security in 2023
The following 38 states plus the District of Colombia don't tax Social Security benefits as of 2023. Nine of these states don't have a state income tax.
- Alabama
- Alaska (no state income tax)
- Arizona
- Arkansas
- California
- Delaware
- Florida (no state income tax)
- Georgia
- Hawaii
- Idaho
- Illinois
- Indiana
- Iowa
- Kentucky
- Louisiana
- Maine
- Maryland
- Massachusetts
- Michigan
- Mississippi
- Nevada (no state income tax)
- New Hampshire (no state income tax, though dividends and interest are taxable)
- New Jersey
- New York
- North Carolina
- North Dakota
- Ohio
- Oklahoma
- Oregon
- Pennsylvania
- South Carolina
- South Dakota
- Tennessee (no state income tax)
- Texas (no state income tax)
- Virginia
- Washington (no state income tax)
- Wisconsin
- Wyoming (no state income tax)
Bear in mind, though, that it's essential to consider whether you'll pay more for other types of taxes, like property tax and sales tax, depending on the state you choose to retire in.
How to minimize your taxes in retirement
Lowering your tax burden in retirement isn't just about choosing a tax-friendly state. During your working years, consider contributing to tax-advantaged accounts that don't give you an upfront tax break so you can get the tax benefits later on.
Investing in a Roth IRA or a Roth 401(k) is a great choice because your withdrawals won't be taxed in retirement, though you won't lower your tax bill for the year you contribute. The income won't count against you for Social Security's purposes, so contributing can help you shield your future benefits from taxes.
Also consider a health savings account (HSA) if you have a high-deductible health plan (HDHP). The money stays with you from year to year if you don't use it, and withdrawals are never taxed if they're used for a qualifying medical expense. Given the high costs of healthcare in retirement, an HSA can provide a tax-free source of income to help with those expenses.
