Understanding Social Security and SSDI Tax Obligations: What Retirees Should Know

Tax filing season presents unique challenges for those receiving Social Security benefits. The taxation of these benefits operates differently than most people expect, with both federal and state governments claiming potential portions of retirement income. Understanding how Social Security becomes taxable income—and in what situations SSDI taxable income matters—is essential for accurate tax planning.

How Federal Tax Applies to Social Security Income

The federal government taxes Social Security benefits when your combined income surpasses specific thresholds. Combined income is calculated by adding your adjusted gross income (AGI), any nontaxable interest earned, and fifty percent of your Social Security benefits.

The taxation structure depends on your filing status:

Single filers: The 0% threshold sits at $25,000. Between $25,000 and $34,000, you’ll owe tax on up to 50% of benefits. Income exceeding $34,000 means up to 85% becomes taxable.

Joint filers: The corresponding thresholds are $32,000, $44,000, and above $44,000.

These income thresholds were established in 1984 and have never been adjusted for inflation. This creates a significant problem: as annual cost-of-living adjustments (COLAs) push benefit payments higher each year, more beneficiaries fall into higher tax brackets. Today, substantially more retirees pay taxes on Social Security compared to when this law first took effect four decades ago.

Those owing federal tax on Social Security must either make quarterly estimated tax payments to the IRS or request benefit withholding by submitting Form W-4V to their local Social Security office.

State-Level Taxation: A Patchwork System

While 41 states plus Washington D.C. don’t tax Social Security at all, nine states maintain active taxation systems for retirement benefits. Additionally, 13 states exempt all retirement income from taxation entirely. Understanding your specific state’s rules is crucial.

Colorado taxes Social Security at 4.4% (declining to 4% in 2025). Residents aged 65+ can deduct all federally taxable Social Security. Those under 65 can deduct up to $20,000.

Connecticut’s system is more generous for lower earners. Tax rates range from 2% to 6.99%, but benefits are exempt for single filers below $75,000 AGI and joint filers below $100,000 AGI. Even above these thresholds, no more than 25% of Social Security becomes taxable.

Minnesota offers exemptions for single filers with AGI below $82,190 and joint filers below $105,380, with tax rates spanning 5.35% to 9.85%.

Montana takes a stricter approach, applying rates of 4.7% to 5.9%, with only a $5,500 deduction available for those 65 and older. This represents one of the most aggressive state tax treatments.

New Mexico exempts Social Security for single filers under $100,000 and joint filers under $150,000 AGI, with rates from 1.7% to 5.9%.

Rhode Island permits exemptions for single filers below $104,200 and joint filers below $130,250, taxing at 3.75% to 5.99%.

Utah provides a 4.65% flat rate but offers tax credits for single filers with modified AGI below $45,000 and joint filers below $75,000.

Vermont’s graduated rates (3.35% to 8.75%) apply to single filers exceeding $50,000 and joint filers exceeding $65,000 AGI.

West Virginia exempts benefits for single filers below $50,000 and joint filers below $100,000 AGI, with rates from 2.36% to 5.12%.

The Distinction Between Social Security and SSDI Taxation

While standard Social Security taxation follows the rules outlined above, understanding how SSDI taxable income operates requires similar analysis. Social Security Disability Insurance (SSDI) benefits follow identical federal taxation rules as retirement benefits, meaning SSDI recipients must also navigate combined income thresholds and potential tax liability.

Planning effectively means recognizing that both benefit types carry potential tax consequences, requiring careful income management year to year.

Planning Your Retirement Tax Liability

The intersection of federal thresholds frozen since 1984 and varying state systems creates complexity. Retirees benefit from proactive tax planning—understanding your specific combined income threshold and state regulations allows you to structure income strategically and potentially reduce overall tax burden.

Taking time to understand these rules before retirement arrives ensures you’re not caught off guard when tax season approaches.