This article takes a look at the 10 states that tax Social Security in 2024. If you wish to skip our detailed analysis on tax implications and relocation trends, you may go to 5 States That Tax Social Security in 2024.
Tax Implications, Relocation Trends, and Social Security Benefits in 2024
If you’re about to retire, chances are you have already figured out how much money you need to retire comfortably and crafted a strategic plan to achieve the goal. In case you haven’t, the latest survey from The Charles Schwab Corporation (NYSE:SCHW) reveals that Americans estimate they need at least $1.8 million to retire comfortably. While saving up for retirement is a task in itself, the process is multifaceted. One facet of this retirement planning entails not only saving but also strategically managing taxes, including the taxation of Social Security benefits. As retirees transition from their working years to retirement, they encounter varying tax landscapes across different states. For those who are looking to move to other states, many often wonder about the tax implications associated with retiring to them.
Rightly so, even though states like Texas and Florida may be popular states to retire to considering they don’t tax retirement income, there are yet many other factors that potential retirees must account for before making a move. The Charles Schwab Corporation (NYSE:SCHW) accurately explains this by asking retirees to take into account their overall tax liability. This tax liability depends largely upon where you choose to live.
Here’s what Hayden Adams has to say about retiring to a state like Florida:
"Florida's lack of an income tax may seem like a bargain, but property tax there is high, and the government raises the bulk of its revenue through state and local sales taxes. That's why it's important to consider your entire tax burden”.
Then again, companies and organizations like U-Haul Holding Company (NYSE:UHAL), Hire a Helper, and Redfin Corporation (NASDAQ:RDFN) are quick to spot relocation trends that are in favor of the Sunshine State. For starters, Florida is the top growth state of 2023, only beaten by Texas in the process. The allure of beaches, sunshine, low cost of living, and tax-free environment has continuously helped it rank amongst U-Haul Holding Company (NYSE:UHAL)’s top growth states over the years. Specifically, the Palm Bay-Melbourne market is one of the 7 top growth cities in Florida that U-Haul has identified.
"Growth in the Palm Bay-Melbourne area has been increasing at an explosive rate. The Space Coast has many companies investing in this region and creating jobs such as Embraer®, SpaceX®, Northrop Grumman®, Lockheed Martin® and L3Harris Technologies®. We have a low cost of living compared to many of the northern cities people have left. Add to that our fantastic year-round climate, and you can see why Palm Bay-Melbourne is such a desirable area to live."
Similarly, last year’s report from Redfin Corporation (NASDAQ:RDFN) highlighted how individuals have been relocating to Florida despite of being deemed as “high-risk”. The Redfin analysis revealed that the most flood-prone U.S. counties had an estimated 384,000 more people move in than out in the years 2021 and 2022. One such high-risk area is Lee County, while another is Cape Coral.
“Builders in Cape Coral have not stopped—they’re just building like nothing happened. That’s largely because there’s plenty of demand for new homes. Many folks who moved into Florida from the Northeast or the West during the pandemic are leaving, but they’re quickly being replaced by new out-of-staters. Some people just want to be on the water no matter what, and/or they want to move here for family, weather or political reasons. The Cape is not slowing down.”
Judging by the above statistics, it is safe to say that retirees today are only interested in bringing down their costs. This is because a large majority of them are solely reliant on their Social Security checks. For these individuals, it is best to opt for states that don’t tax Social Security benefits in 2024. Ideally, retirees should make informed decisions by meticulously calculating their total tax liabilities, taking into account essential factors such as proximity to family, healthcare services, and other pertinent considerations.
10 States That Tax Social Security in 2024
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Methodology
To compile the list of states that tax Social Security in 2024, we listed out the ten states that still tax Social Security benefits. Next, we ranked them on their tax friendliness and cost of living, with more points given to states that had higher costs of living and lower tax-friendliness. Scores were summed up and places were ranked in an ascending order form the lowest to the highest scores. Previously, two other states were also taxing Social Security, namely Nebraska and Missouri. However, Social Security will not be taxed in Missouri in 2024. Neither will it be taxed in Nebraska.
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Here is the List of States That Tax Social Security in 2024:
10. Kansas
Insider Monkey Score: 3
Cost of Living Index: 87.1
Tax Friendliness: Moderately Tax Friendly
First up on our list of states that tax Social Security benefits in 2024 is Kansas. The state is considered moderately tax-friendly for retirees, and exempts retirement income from taxes depending on their Adjusted Gross Income (AGI). For seniors with an AGI of less than $75,000, their Social Security income isn’t taxed. Tax payers who’s AGI exceeds that limit will have to pay Social Security taxes in full. Other forms of retirement income such as from pensions, IRAs, and 401(k) distributions are fully taxable at a low of 3.1% (on up to $30,000) and a high of 5.7% (on more than $60,000). The average effective property tax rate in the country is 1.33%, higher than the 0.99% national average. Meanwhile, the sales tax rate is 6.5%, and there is a local sales tax rate as well.
9. West Virginia
Insider Monkey Score: 4
Cost of Living Index: 87.7
Tax Friendliness: Tax Friendly
West Virginia, an otherwise tax friendly state, still taxes social security in 2024. Many lists do not include the state of West Virginia when mentioning all the states that tax Social Security. This is because the state has eliminated the tax already for single taxpayers that make less than $50,000 a year. According to WCHS, the House of Delegates sent over a bill that would reduce the social security tax by 35% in 2024, 65% in 2025 and phase it out completely in 2026. This would make West Virginia more attractive for retirees, as it already has a low cost of living to begin with.
8. New Mexico
Insider Monkey Score: 6
Cost of Living Index: 94
Tax Friendliness: Moderately Tax Friendly
Number eight on our list of states that are still taxing Social Security benefits as of 2024 is New Mexico. From tax year 2022, most seniors have been exempt from paying taxes on their Social Security benefits. The exemption was available to single taxpayers with less than $100,000 in income, to married couples filing jointly, surviving spouses and heads of household with under $150,000 in income, as well as to married couples filing separately with under $75,000 in income. According to Tax Foundation, New Mexico has a sales tax rate of 5% and a max local sales tax rate of 3.8%. New Mexico may be taxing Social Security benefits for some, however, its cost of living is 6% lower than the national average.
7. Montana
Insider Monkey Score: 8
Cost of Living Index: 102.9
Tax Friendliness: Moderately Tax Friendly
Unless your Federal Adjusted Gross Income is below a certain threshold, your Social Security benefits are going to be taxed in the state of Montana. For retirees whose income is above $25,000 for single filers and $41,000 for joint filers, Social Security benefits will be taxed at an income tax rate of 5.9%, notes Kiplinger. Meanwhile, the average effective property tax rate is 0.74%, which is below the national average. Moreover, the sales tax rate is nil. This implies that Montana is one of the few states that do not have a general sales tax. The cost of living in this state is 2.9% higher than the national average.
6. Colorado
Insider Monkey Score: 9
Cost of Living Index: 105.1
Tax Friendliness: Tax Friendly
Number six on our list of states that tax Social Security in 2024 for retirees is Colorado. For those asking if Colorado still tax Social Security retirement income, the answer is that not all retirees in Colorado have to have their benefits taxed in the state. For seniors aged 65 and above whose federal taxable income tops $24,000; they can subtract the full amount of these benefits from their Colorado tax returns. However, those who are under 65 years of age, only the first $20,000 isn’t taxed.
