The Trump administration has been making headlines with its plans to eliminate taxes on Social Security income, aiming to lessen the financial strain on older Americans. Still, even with potential federal changes, certain states continue to impose taxes on retirement income.
Why does this matter?
President Trump’s major legislation, often referred to as the “big beautiful bill,” recently passed the House with a narrow margin of 215-214 and is now under consideration in the Senate.
The Senate version proposes a temporary tax credit up to $6,000 for eligible individuals aged 65 and older. Meanwhile, the House’s plan includes a similar provision dubbed a “bonus,” but it caps the deduction at $4,000.
It’s important to note that passing this bill won’t change state-specific income taxes, which remain separate from federal taxes.
What’s the current situation?
As it stands, federal rules allow up to 85% of Social Security benefits to be taxed for individuals earning more than $34,000, or couples with combined incomes over $44,000.
Most Social Security recipients aren’t subject to state taxes on their retirement income. Currently, only nine states tax these benefits. Colorado, Connecticut, Minnesota, Montana, New Mexico, Rhode Island, Utah, Vermont, and West Virginia plan to eliminate taxes on Social Security income by 2026.
Additionally, tax regulations vary from state to state, determining who pays and how much, with some states offering partial or complete exemptions depending on age and income.
- Colorado: Residents aged 65 and older are exempt. From 2025, those aged 55-64 can also avoid federal Social Security income taxes if their AGI is below $75,000 ($95,000 for couples).
- Connecticut: Offers full exemption for incomes below $75,000 (single) or $100,000 (joint). Earnings beyond these thresholds may be taxed up to 25%.
- Minnesota: Full exemptions for incomes below $82,190 (single) or $105,380 (joint), with partial exemptions above those amounts, and full taxation for higher earnings.
- Montana: Aligns its taxation with federal rules.
- New Mexico: Exempts taxable benefits for those earning less than $100,000 (single) and $150,000 (joint).
- Rhode Island: If individuals reach full retirement age with incomes under $104,200 (single) or $130,250 (joint), they are exempt.
- Utah: Taxes exceed $45,000 (single) or $75,000 (joint) but provide tax credits.
- Vermont: Full exemptions for incomes below $50,000 (single) or $65,000 (joint), with partial exemptions that cap at $60,000/$75,000, and full taxation above those thresholds.
What are the opinions?
President Trump expressed: “It’s crucial that my friends in the Senate act quickly to send this bill to my desk!”
Karla Dennis, a tax advisor and CEO of KDA Inc. Newsweek: “Eliminating taxes on Social Security could really ease the situation for retirees. Many seniors aren’t prepared for unexpected tax bills during retirement. This change could offer genuine, long-term relief instead of just temporary fixes.”
What’s next?
The bill will undergo scrutiny before it goes back to the House of Representatives for a final vote in the Senate.
