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Taxation of Social Security Benefits

How are Social Security benefits taxed?

Under current law, up to 85 percent of Social Security benefits are subject to federal and state income tax, depending on the taxpayer's income. For taxpayers with provisional incomes less than $25,000 ($32,000 for married joint taxpayers), all Social Security benefits are excluded from taxable income. For provisional incomes between $25,000 and $34,000 ($32,000 and $44,000 for married joint taxpayers), up to 50 percent of Social Security benefits may be subject to tax. For those with provisional incomes over $34,000 ($44,000 for married joint taxpayers), up to 85 percent of Social Security benefits may be included in taxable income.

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What is provisional income?

In determining the amount of Social Security benefits included in taxable income, the provisional income measure used is adjusted gross income excluding Social Security benefits, plus one-half of Social Security benefits. Tax-exempt interest (e.g., from municipal bonds) is also included in provisional income.

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What is the average monthly benefit for retired workers?

The average monthly benefit as of June 30, 2013, for a retired worker and spouse is $2,065. This works out to $24,780 per year for a retired couple at the average benefit level. For single recipients the average monthly benefit is $1,257 or $15,084 annually.

The following table shows income levels at which Social Security would be fully exempt, subject to inclusion in taxable income at the 50 percent rate, and subject to inclusion in taxable income at the 85 percent rate for an example couple and single retiree with the average level of benefits. Total income refers to the combination of taxable source income and Social Security.

Taxation of Social Security Benefits, Tax Year 2014
Retired worker and spouse Retired single worker
Annual Social Security income: $24,780 Annual Social Security income: $15,084
Social Security exempt Total income less than $44,390 Total income less than $32,542
Social Security included in taxable income at 50% rate Total income between $44,390 and $56,390 Total income between $32,542 and $41,542
Social Security included in taxable income at 85% rate Total income between $56,390 and $74,111 Total income between $41,542 and $51,332
Social Security included in taxable income at 85% rate Total income over $74,111 Total income over $51,332

The table shows that a married couple that receives the average Social Security benefit of $24,780 and has total income from all sources of less than $44,390 is not subject to tax on any Social Security benefits, while a couple with average benefits and total income over $74,111 must include 85 percent of the Social Security, or $21,063, in taxable income. Social Security income included in taxable income is taxed at the same rate as other kinds of income–5.35 percent, 7.05 percent, 7.85 percent, or 9.85 percent depending on the total amount of taxable income. See more information on income tax brackets.

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How much does it cost the state to forego revenues from taxing Social Security benefits?

Minnesota conforms to federal law in excluding all or part of Social Security benefits from income tax. The Minnesota Department of Revenue's Tax Expenditure Budget for 2012-2015 shows an estimated cost in foregone tax revenues of $234.0 million in fiscal year 2014 and $255.1 million in fiscal year 2015 as a result of conforming to federal tax treatment of Social Security benefits.

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What is the tax treatment of Social Security benefits in other states in 2014?

  • Nine states do not have an income tax or have a tax limited to specific kinds of unearned income.
  • Twenty-nine states with an income tax exempt Social Security benefits from taxation.
  • Three states exclude a portion of Social Security benefits that are subject to tax at the federal level.
  • Two states provide a general retirement income exclusion that may result in the exclusion from taxation of part or all of Social Security benefits.
  • One state subjects Social Security benefits to income tax on the same basis as the federal government, but uses a slightly different income measure to determine the amount of benefits subject to tax.
  • Seven states apply the state income tax to Social Security benefits that are taxable at the federal level.

Nine states do not have an income tax or have a tax limited to specific kinds of unearned income. The nine states: Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming.

Nine states that do not have an income tax

Twenty-nine states with an income tax exempt Social Security benefits from taxation. The 29 states: Alabama, Arizona, Arkansas, California, Delaware, District of Columbia, Georgia, Hawaii, Idaho, Illinois, Indiana, Iowa, Kentucky, Louisiana, Maine, Maryland, Massachusetts, Michigan, Mississippi, New Jersey, New York, North Carolina, Ohio, Oklahoma, Oregon, Pennsylvania, South Carolina, Virginia, and Wisconsin.

29 states that exempt Social Security benefits from taxation

Three states exclude a portion of Social Security benefits that are subject to tax at the federal level or provide a full exclusion to taxpayers meeting income requirements. The three states: Connecticut, Kansas, and Missouri.

3 states that exclude a portion of Social Security benefits

Two states provide a general retirement income exclusion or credit that may result in the exclusion from taxation of part or all of Social Security benefits or in a credit against taxes otherwise due on Social Security benefits. The two states: Colorado and Utah.

3 states that provide a general retirement income exclusion or credit

One state, Montana, subjects Social Security benefits to income tax on the same basis as the federal government, but uses a slightly different income measure to determine the amount of benefits subject to tax.

One state that subjects Social Security benefits to income tax

Seven states apply the state income tax to Social Security benefits that are taxable at the federal level. The six states: Minnesota, Nebraska, New Mexico, North Dakota, Rhode Island, Vermont, and West Virginia.

Six states that apply the state income tax to Social Security benefit

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February 2014

House Research Department  ♦  600 State Office Building, Saint Paul, MN  55155  ♦  House.Research@house.mn