The Phone Call That Changed Linda’s Retirement Plan
Linda Gutierrez thought she had everything figured out. After 34 years as a public school teacher in Minnesota, she retired in 2024 with a comfortable pension, a modest 401(k), and a Social Security benefit of $2,180 per month. She’d done the math — or so she believed.
Then her accountant called in February 2025 with unwelcome news: she owed the state of Minnesota $1,340 in taxes on her Social Security income. Linda had no idea her state even taxed those benefits. “I felt blindsided,” she told me when she reached out for guidance. “Nobody warned me about this.”
Linda’s story is one I’ve heard dozens of times during my 15 years working in consumer finance, including my tenure at the CFPB. And heading into 2026, the landscape of states that tax Social Security benefits is shifting again — in ways that could affect millions of retirees’ bottom lines.
The Federal Baseline: How Social Security Is Taxed Nationally
Before we talk about state taxes, let’s ground ourselves in the federal picture. Up to 85% of your Social Security benefits can be subject to federal income tax, depending on what the Social Security Administration and the IRS call your “combined income” — your adjusted gross income plus nontaxable interest plus half your Social Security benefits.
For individual filers, if that combined income falls between $25,000 and $34,000, up to 50% of benefits are taxable. Above $34,000, up to 85% becomes taxable. For married couples filing jointly, those thresholds are $32,000 and $44,000 respectively.
Here’s what frustrates many of the retirees I advise: those thresholds haven’t been adjusted for inflation since they were established in 1983 and 1993. What I see most often is middle-income retirees — people who never considered themselves wealthy — getting pulled into higher taxation brackets simply because the goalposts haven’t moved in over 30 years. Congress has discussed new approaches to Social Security benefit taxation in 2026, but as of this writing, no federal reform has been enacted.
Which States Tax Social Security Benefits in 2026?
Most states leave Social Security alone. But nine states still impose some level of state income tax on Social Security benefits heading into 2026. That number has been shrinking — West Virginia, for example, began phasing out its Social Security tax in 2024 and will fully eliminate it by 2026. But for retirees living in the remaining states, the tax bite can be significant.
| State | Taxes Social Security in 2026? | Key Exemption or Threshold | Notes |
|---|---|---|---|
| Colorado | Yes (limited) | Fully exempt for those 65+; partial exemption ages 55–64 | Major reform took effect in 2025 expanding exemptions |
| Connecticut | Yes | Exempt if AGI below $75,000 (single) / $100,000 (joint) | Phased exemption above thresholds |
| Minnesota | Yes | Partial subtraction; income-dependent phase-out | Reform ongoing; many middle-income retirees still affected |
| Montana | Yes | Follows federal taxability rules | Uses federal AGI as starting point |
| New Mexico | Yes (limited) | Exempt if income below $100,000 (single) / $150,000 (joint) | 2024 reform significantly narrowed who pays |
| Rhode Island | Yes | Exempt if AGI below $101,000 (single) / $126,250 (joint) | Thresholds adjusted annually for inflation |
| Utah | Yes | Tax credit offsets for lower-income filers | Credit phases out at higher income levels |
| Vermont | Yes | Exempt if AGI below $50,000 (single) / $65,000 (joint) | Partial exemption above thresholds |
| West Virginia | Phasing out | 65% of benefits exempt in 2025; fully exempt by 2026 | Complete phase-out expected to take effect for 2026 tax year |
If you live in one of the 41 other states (plus Washington, D.C.), you won’t owe state tax on your Social Security — either because your state has no income tax at all (like Florida, Texas, or Nevada) or because it specifically exempts Social Security from taxation.
The Real-Dollar Impact: How Much Are We Talking About?
Let me put some numbers to this. Take a married couple in Vermont with a combined AGI of $82,000, of which $36,000 comes from Social Security. Under Vermont’s rules, they’d exceed the $65,000 joint exemption threshold, meaning a portion of their benefits would be subject to state tax at rates ranging from 3.35% to 8.75%.
Depending on their bracket, that could mean an additional $800 to $1,500 in state taxes — money that many retirees on fixed incomes simply haven’t budgeted for. When you combine that with federal taxation of benefits and rising Medicare premiums, the squeeze becomes very real.
In my experience at the CFPB, I found that retirees facing this kind of combination of financial pressures were far more likely to dip into savings prematurely. And recent survey data confirms this trend is accelerating — inflation combined with unexpected tax obligations is a one-two punch that many retirement plans weren’t built to absorb.
Why Linda’s Story Matters: The “Stealth Tax” Problem
Back to Linda in Minnesota. What made her situation especially frustrating was what I call the “stealth tax” effect. She’d carefully planned her retirement income to stay modest — but a Required Minimum Distribution from her late husband’s IRA pushed her combined income just above Minnesota’s subtraction phase-out threshold.
Suddenly, a larger portion of her Social Security became taxable at the state level. She didn’t earn more money. She didn’t change her lifestyle. A single mandatory withdrawal triggered a cascade of tax consequences she never saw coming.
This is the scenario I often warn readers about. Your combined income isn’t just your paycheck or pension — it includes RMDs, capital gains from selling investments, even interest from savings accounts. In states that tax Social Security benefits, every additional dollar of income can increase how much of your benefits get taxed.
The RMD Trap
Required Minimum Distributions are particularly dangerous for this calculation. Once you turn 73 (the current age under the SECURE 2.0 Act), you must withdraw a minimum amount from traditional IRAs and 401(k)s each year. Those withdrawals count as taxable income and can push your Social Security benefits into taxation territory — at both the federal and state level.
I’ve seen retirees whose RMDs added $15,000 to $25,000 in annual income they didn’t need or want, solely because the IRS required the withdrawal. In a state like Montana or Connecticut, that can translate into hundreds or thousands of additional dollars in state tax on Social Security.
Strategies to Reduce or Eliminate State Taxes on Social Security
The good news is that you’re not powerless. Here are approaches I’ve seen work effectively for retirees navigating states that tax Social Security benefits.
Roth Conversions Before You Claim
If you’re between 59½ and your Social Security claiming age, consider converting traditional IRA funds to a Roth IRA. Yes, you’ll pay income tax on the conversion now — but Roth withdrawals don’t count toward combined income later. This can keep your Social Security benefits below taxable thresholds at both the federal and state level.
The math doesn’t work for everyone, but for retirees with significant traditional IRA balances, a phased Roth conversion strategy over several years can dramatically reduce lifetime taxes on Social Security. I recommend working with a tax professional who understands your state’s specific rules.
Income Timing and Bunching
In states with hard income thresholds — like Connecticut’s $75,000/$100,000 line — staying even one dollar below the cutoff can mean the difference between zero state tax on Social Security and full taxation. Strategic timing of capital gains, IRA withdrawals, or even part-time work income can help you stay under the line in a given tax year.
Relocation: The Nuclear Option
I don’t suggest uprooting your life casually. But I’ve worked with retirees who saved $2,000 to $4,000 annually by moving from a state that taxes Social Security to one that doesn’t. For someone with a 25-year retirement horizon, that’s $50,000 to $100,000 in preserved wealth — before accounting for investment growth.
States like Florida, Tennessee, Wyoming, and South Dakota have no state income tax at all. Others, like Pennsylvania and Mississippi, exempt all retirement income including Social Security. For retirees already considering a move for climate, family, or cost-of-living reasons, the tax picture should absolutely factor into the decision.
What’s Changing in 2026 and Beyond
The trend is clearly moving toward eliminating state Social Security taxes. West Virginia’s full phase-out in 2026 is the latest example, and legislative proposals are active in several remaining states. In Minnesota, a bipartisan bill introduced in 2025 would expand the state’s Social Security subtraction significantly, potentially exempting most middle-income retirees by 2027.
At the federal level, there’s renewed discussion about reforming how Social Security is taxed — including proposals to raise the combined income thresholds that haven’t budged since the Clinton administration. The IRS would need to implement any changes Congress passes, and so far, none have made it to the President’s desk.
Meanwhile, the cost-of-living adjustment (COLA) for Social Security in 2026 is projected to land between 2.2% and 2.8%, depending on third-quarter CPI data. Many retirees are already expressing frustration that this modest increase won’t keep pace with rising Medicare Part B premiums and grocery costs. As we’ve covered in our analysis of recent COLA projections, even a seemingly generous adjustment can be eaten up by healthcare inflation alone.
Protecting Your Bigger Financial Picture
State Social Security taxation doesn’t exist in a vacuum. It interacts with federal taxes, Medicare premium surcharges (IRMAA), and your overall retirement withdrawal strategy. What I tell my readers is this: the tax on your Social Security check is a symptom, not the disease. The real issue is whether your total retirement income plan accounts for all these interconnected variables.
If you’re feeling the pressure of inflation on your retirement savings, you’re not alone. A recent survey found that older adults are depleting retirement savings faster than expected in 2026, driven by a combination of healthcare costs, housing expenses, and yes — taxes they didn’t anticipate.
A Checklist for Retirees in Affected States
- Review your state’s specific exemption thresholds annually — they often change with new legislation or inflation adjustments
- Calculate your “combined income” before year-end so you can make strategic withdrawal decisions
- Ask your tax preparer specifically about Social Security taxation — many general practitioners overlook state-level nuances
- Consider consulting with a fee-only financial planner (not one who earns commissions) for a retirement tax projection
- Monitor your state legislature’s activity — bills to eliminate Social Security taxes are popular and bipartisan
- If you’re exploring safer investment options to manage income levels, review strategies for high-return, low-risk investments that can help you control taxable income
Linda’s Resolution — and Yours
Linda ultimately worked with a tax advisor who helped her restructure her RMD timing and begin a partial Roth conversion strategy. She expects to reduce her Minnesota state tax on Social Security by roughly 60% in 2026. She’s also watching the state legislature closely — if Minnesota expands its exemption, she may owe nothing at all within two years.
“I wish I’d known five years ago what I know now,” she told me. That’s a sentiment the Consumer Financial Protection Bureau hears constantly from retirees navigating the tax system. And it’s exactly why understanding which states tax Social Security benefits isn’t just a trivia question — it’s a retirement planning essential.
The rules are changing, and for once, the changes are mostly moving in retirees’ favor. But until your state crosses the finish line, staying informed and planning proactively is the best defense you have.
Frequently Asked Questions
How many states tax Social Security benefits in 2026?
Nine states still impose some level of tax on Social Security benefits in 2026: Colorado, Connecticut, Minnesota, Montana, New Mexico, Rhode Island, Utah, Vermont, and West Virginia (which is completing its phase-out). Each state has different exemption thresholds and rules, so the actual impact varies widely depending on your income level.
Can I avoid state taxes on Social Security by moving to another state?
Yes, relocating to a state with no income tax (such as Florida, Texas, or Nevada) or one that fully exempts Social Security (such as Pennsylvania or Mississippi) can eliminate state-level taxation on your benefits. However, you must establish genuine residency in the new state — simply maintaining a mailing address is not sufficient for tax purposes.
Do Roth IRA withdrawals affect whether my Social Security is taxed?
No, qualified Roth IRA withdrawals are not included in the "combined income" calculation used to determine whether your Social Security benefits are taxable at the federal or state level. This is why converting traditional IRA funds to a Roth before claiming Social Security can be a powerful tax-reduction strategy.
Will the federal government stop taxing Social Security benefits?
Several proposals have been introduced in Congress to reduce or eliminate federal taxation of Social Security benefits, but none have been signed into law as of mid-2026. The income thresholds that trigger federal taxation ($25,000 for individuals and $32,000 for couples) have not been updated since 1983 and 1993, which means more retirees are subject to the tax each year due to inflation.
About Sarah Mitchell, Former CFPB Senior Analyst
Sarah Mitchell is a consumer finance expert with 15 years of experience protecting American consumers. She spent eight years as a senior analyst at the Consumer Financial Protection Bureau (CFPB), where she investigated financial fraud targeting older adults and developed consumer education programs. At Daily Trends Now, Sarah covers scam awareness, smart shopping strategies, discount programs, and consumer rights — helping seniors protect their wallets and avoid costly traps.
