Starting in 2025, nine states in the U.S. will begin taxing Social Security benefits, marking a significant change for retirees and those receiving benefits. If you live in one of these states, it’s crucial to prepare for how this will affect your income and financial planning.
While this may not be the news you were hoping for, there are proactive steps you can take right now to reduce the impact.
Here’s a breakdown of the 9 states that will start taxing Social Security benefits, and more importantly, what you need to do right now to prepare for these changes.
Which States Will Tax Social Security Benefits in 2025?
The following states are expected to start taxing Social Security benefits in 2025:
- Colorado
- Connecticut
- Minnesota
- Montana
- Nebraska
- New Mexico
- North Dakota
- Rhode Island
- Utah
Each of these states has its own specific rules and thresholds for how and when they’ll begin taxing Social Security benefits, so it’s important to review the specifics of your state’s policy.
Why Is This Happening?
Social Security benefits have traditionally been exempt from state income tax in many parts of the country, but state governments are facing rising budgets and increasing financial pressures. To make up for shortfalls in funding, these nine states have made the decision to begin taxing Social Security benefits in 2025.
The amount of tax you’ll owe will depend on factors like your income level, filing status, and other state-specific rules. In some cases, the taxation could be modest, while in others, it may have a more significant impact on your retirement income.
What You Need to Do Right Now
Even though these changes won’t take effect until 2025, it’s essential to take action now so that you’re not caught off guard when the time comes. Here are three important steps you can take immediately to help minimize the impact of these new taxes:
1. Review Your Retirement Income Sources
The first thing you should do is assess your overall retirement income. This includes your Social Security benefits, pension, retirement savings (like 401(k)s or IRAs), and any other income streams you may have. With Social Security benefits now subject to tax in these states, it’s important to understand how much of your income will be impacted.
Take note of any sources of retirement income that may be taxed differently in your state, and consider speaking to a financial advisor to get a clear picture of your future tax obligations. You may find that increasing your withdrawals from tax-deferred accounts, like IRAs, before 2025 could reduce your taxable income from Social Security later on.
2. Consider Relocating to a State That Does Not Tax Social Security Benefits
If you are already planning to retire or are looking for ways to minimize the impact of the new taxes, it might be worth considering relocating to a state that does not tax Social Security benefits. Some states, like Florida, Texas, and Wyoming, currently do not tax Social Security benefits, which can be a significant advantage in your retirement planning.
While moving is a big decision that involves more than just tax considerations, it’s worth evaluating whether relocating could benefit you in the long term. You may also want to weigh other factors, such as cost of living, healthcare, and quality of life, to help you make a more informed decision.
3. Maximize Tax-Advantaged Accounts and Deductions
As states begin taxing Social Security benefits, it becomes even more critical to take full advantage of tax-deferred or tax-free savings accounts. In 2025, your Social Security benefits may be taxed based on your total income, including withdrawals from retirement accounts. By contributing to tax-advantaged accounts such as IRAs, 401(k)s, or health savings accounts (HSAs), you can reduce your taxable income and potentially keep more of your Social Security benefits out of the tax range.
Additionally, be sure to review your state’s deductions or exemptions related to Social Security income. Some states may offer specific deductions or credits for Social Security income, so understanding how these rules will change in 2025 will help you plan accordingly.
4. Consult with a Financial Advisor or Tax Professional
Tax laws, especially state-level tax changes, can be complex. Working with a financial advisor or tax professional is one of the best ways to ensure you’re on the right track. They can help you navigate the new rules in your state, optimize your retirement income strategy, and avoid any surprises when taxes are due.
Financial advisors can also help you with long-term retirement planning, recommending strategies for reducing your taxable income and understanding the full picture of your tax liabilities, both now and in the future.
5. Monitor Legislative Changes
While the new tax rules are set to take effect in 2025, it’s important to stay informed about any changes that could impact you. State tax laws can be adjusted, and there may be additional exemptions or credits introduced over the next few years. Keeping an eye on potential updates will help you stay ahead of the curve and adapt your plans as needed.
The decision by nine states to begin taxing Social Security benefits in 2025 is a significant change, but it doesn’t have to derail your retirement plans. By reviewing your retirement income sources, considering relocation, maximizing tax-advantaged accounts, and consulting with a professional, you can reduce the impact of these new taxes and continue to enjoy your retirement years with confidence.
Take these steps now to protect your income and minimize your future tax burden. While 2025 may seem far off, early preparation will help you navigate these changes smoothly and avoid any last-minute surprises.
