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Legislature > House of Representatives > House Research > Income Taxes: Individual & Corporate

Taxation of Social Security Benefits

How are Social Security benefits taxed?

Up to 85 percent of Social Security benefits are subject to federal and state income tax, depending on the taxpayer's income. Benefits subject to federal and state tax include retirement, survivor, and disability benefits, but not supplemental security income (SSI) payments, which are not taxed. The amount of benefits included in taxable income depends on the taxpayer's provisional income.

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What is provisional income?

Provisional income is the income measure used to determine the amount of Social Security benefits included in taxable income. Provisional income equals adjusted gross income excluding Social Security benefits, plus tax-exempt interest (e.g., from municipal bonds) and one-half of Social Security benefits.

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How much of Social Security benefits are subject to federal income tax?

Taxayers with Social Security benefits complete a federal worksheet to determine how much of their benefits are subject to tax. The following table shows income levels at which Social Security benefits are 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 a married couple and a single filer.

Federal Taxation of Social Security Benefits
Married couple Single filer
Social Security exempt Provisional income less than $32,000 Provisional income less than $25,000
Social Security included in taxable income at up to 50% rate (first tier) Provisional income between $32,000 and $44,000 Provisional income between $25,000 and $34,000
Social Security included in taxable income at up to 85% rate (second tier) Provisional income over $44,000 Provisional income over $34,000

Social Security benefits are excluded from federal taxable income for beneficiaries with provisional income below the first tier threshold ($32,000 for married couples and $25,000 for other filers).

The amount included in federal taxable income for beneficiaries with provisional income over the first tier threshold, but less than the second tier threshold, equals 50 percent of provisional income over the first tier threshold, up to at most 50 percent of benefits.

The amount included in federal taxable income for beneficiaries with provisional income over the second tier threshold equals 85 percent of provisional income over the second tier threshold, plus 50 percent of provisional income between the second and first tier thresholds, up to at most 85 percent of benefits. The portion of Social Security benefits that is included in federal taxable income is subject to federal tax in the manner as other ordinary income (e.g., wage, salary, and interest income).

Does Minnesota income tax follow the federal tax treatement of Social Security benefits?

For many years (through tax year 2016), Minnesota state income taxation of Social Security benefits followed the federal income tax rules. However, the 2017 Legislature enacted a law expanding the amount of Social Security benefits exempt from state income tax.

Beginning in tax year 2017, Minnesota allows subtraction of a flat amount of benefits that are subject to tax at the federal level--$4,500 for married couples filing joint returns, $3,500 for single and head of household filers, and $2,250 for married separate filers.

The state subtraction is reduced by 20 percent of provisional income over a threshold. The table shows the maximum subtraction and the income levels at which the phaseout begins and ends.

Maximum subtraction Start of phaseout End of phaseout
Married joint $4,500 $77,000 $99,500
Single and head of household $3,500 $60,200 $77,700
Married separate $2,250 $38,500 $49,750

The income thresholds at which the phaseout begins will be adjusted annually for inflation beginning in 2018.

Social Security income included in Minnesota taxable income (after subtraction) 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.

The following tables show examples of how Social Security benefits are taxed.

Example 1: Single retiree, annual Social Security benefits of $15,000 (close to average amount)
Social Security benefits $15,000 $15,000 $15,000
Other taxable retirement and wage income 10,000 25,000 50,000
Provisional income 17,500 32,500 57,500
Amount of Social Security included at 50% rate 0 3,750 4,500
Amount of Social Security included at 85% rate 0 0 8,250
Total Social Security subject to federal income tax 0 3,750 12,750 (85%)
Amount of Social Security exempt from federal income tax 15,000 11,250 2,250
Minnesota income tax subtraction 3,500 3,500 3,500
Total Social Security subject to Minnesota income tax 0 250 9,250
Amount of Social Security exempt from Minnesota income tax 15,000 14,750 5,750
Example 2: Married couple, annual Social Security benefits of $25,000 (close to average amount)
Social Security benefits $25,000 $25,000 $25,000
Other taxable retirement and wage income 10,000 25,000 50,000
Provisional income 22,500 37,500 62,500
Amount of Social Security included at 50% rate 0 2,750 6,000
Amount of Social Security included at 85% rate 0 0 15,250
Total Social Security subject to federal income tax 0 2,750 21,250 (85%)
Amount of Social Security exempt from federal income tax 25,000 22,250 3,750
Minnesota income tax subtraction 4,500 4,500 4,500
Total Social Security subject to Minnesota income tax 0 250 16,750
Amount of Social Security exempt from Minnesota income tax 25,000 25,000 8,250

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

The Minnesota Department of Revenue’s Tax Expenditure Budget for Fiscal Years 2016-2019, last updated in 2016 and based on the assumptions of the November 2015 economic forecast, shows an estimated reduction in state income tax revenues of $316.2 million in fiscal year 2018 and $334.9 million as a result of conforming to federal tax treatment of Social Security benefits. The Minnesota Legislature enacted the subtraction of a flat amount of Social Security benefits in 2017, after the most recent Tax Expenditure Budget was prepared. The Department of Revenue estimated that the subtraction will further reduce state revenues by $57 million in fiscal year 2018 and $60.2 million in fiscal year 2019.

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What is the tax treatment of Social Security benefits in other states in 2016?

  • Nine states do not have an income tax or have a tax limited to specific kinds of unearned income.
  • Twenty-eight states with an income tax exempt Social Security benefits from taxation.
  • Nine states tax some Social Security benefits but less than under the federal rules.
  • Five 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 states: Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming.

Nine states that do not have an income tax

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

28 states that exempt Social Security benefits from taxation

Nine states tax some Social Security benefits but less than what is taxed at the federal level. The states: Colorado, Connecticut, Iowa, Kansas, Missouri, Montana, Nebraska, Rhode Island, and Utah. (Iowa excludes Social Security benefits from its regular tax calculation but includes a portion in its alternate tax. Final liability is the lesser of the regular tax or the alternate tax. Utah allows a nonrefundable credit for retirement income, which consists of private pensions, IRAs, federal, state, and District of Columbia pensions, and Social Security benefits taxable at the federal level. Beginning in 2017, Minnesota will allow subtraction of a flat amount of benefits taxed at the federal level.)

Nine states that exclude a portion of Social Security benefits

Five states apply the state income tax to Social Security benefits that are taxable at the federal level. The states: Minnesota, New Mexico, North Dakota, Vermont, and West Virginia. Beginning in 2017, Minnesota will allow subtraction of a flat amount of benefits taxed at the federal level.

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

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June 2017

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