History

• In 1984, the U.S. government started taxing a portion of the Social Security payments of higher income retirees. Social Security is subject to federal income tax if other "provisional" income exceeds $25,000 for single returns and $32,000 for joint returns. Some states base their income tax filing and rates on the federal taxable income and deductions. Unless there are other provisions in the state tax code, these states also may tax Social Security benefits.
  
  

Identification

• Thirty-six states do not tax Social Security benefits. Nine states have no income tax and 27 of the 41 with income tax do not tax Social Security. The 14 states that include a portion of Social Security payments in taxable income are Colorado, Connecticut, Iowa, Kansas, Minnesota, Missouri, Montana, Nebraska, New Mexico, North Dakota, Rhode Island, Utah, Vermont and West Virginia. Social Security benefits are also subject to income tax in the District of Columbia.
  
  

Considerations

• Iowa and Missouri are phasing out the taxation of Social Security benefits. In Iowa, the phaseout will take place from 2007 until 2014. The Missouri plan has the taxation of Social Security tapering off from 2007 until 2012. This will reduce to 12 the number of states that tax Social Security.
  
  

Other Factors

• Several of the states that tax Social Security have further provisions that reduce the tax costs of retirees in relation to their Social Security payments. Just nine states include Social Security income at the same level as the federal income tax system. These states are Colorado, Kansas, Minnesota, Nebraska, New Mexico, North Dakota, Rhode Island, Vermont and West Virginia.
  
  

Expert Insight

• The AARP noted that two of the main sources of income for retirees are Social Security and pensions. Its report was pleased to note only 15 states (now 14) taxed Social Security benefits and some of those provided additional relief from taxation of Social Security compared to the federal Income tax system.