Retirees in These 8 States Still Face a State Tax on Social Security

State taxes on Social Security benefits are a relic fading fast. Once common, they are now the exception, with only eight states still imposing them in 2026. This marks a clear historical trend: a steady decline as states have responded to retiree pressure and the growing unpopularity of taxing retirement income.

The list of holdouts is specific: Colorado, Connecticut, Minnesota, Montana, New Mexico, Rhode Island, Utah, and Vermont. The most notable change is in West Virginia, which is phasing out its tax entirely. After a three-year phase-out that began in 2024, the final 100% exemption takes effect for the 2026 tax year. Taxpayers won't see the full benefit until they file in 2027, but the state is now firmly on the path to joining the majority of states that exempt these benefits.

For the remaining seven states, the tax often doesn't land on most retirees. Each has varying income thresholds that exempt low-to-middle-income seniors. In practice, this means many who rely on Social Security for a significant portion of their income will not owe a state tax, even if they live in one of these eight states. The persistence of these taxes in a handful of places stands in contrast to the broader national movement to make states more retirement-friendly.

The Mechanics and Financial Impact of the Remaining Tax

The tax bite from these eight states works differently than the federal levy and hits net cash flow directly. Unlike the federal government, which uses a complex formula, state taxes are typically applied to the gross benefit amount. This means a retiree in one of these states sees the tax deducted from their check before it hits their bank account, reducing their immediate spending power.

Federal taxation is far more selective. It uses a "combined income" formula that includes half of a recipient's Social Security benefits plus other income. Only those with higher total incomes face the tax. The new $6,000 senior deduction for tax years 2025–2028 is a key change, designed to lower taxable income. According to a White House analysis, this deduction is expected to reduce the number of seniors paying federal taxes on their benefits to about 12%. Yet this federal relief does not extend to state-level taxation. A state tax is applied regardless of a taxpayer's federal filing status or the use of this deduction.

To gauge the real-world impact, consider the average benefit. The typical retired worker receives about $1,976 per month in January 2025, with the figure ticking up to $1,980.86 in February. The financial effect of a state tax depends on the rate and income thresholds. For instance, in Connecticut, the tax can apply to up to 35% of benefits for higher earners. Applied to that average monthly check, that could mean a state tax of over $200 per month for some retirees. Even with income exemptions that protect lower-income seniors, the tax creates a tangible reduction in net income for those who fall within the taxable brackets.

Investment and Behavioral Implications: A Historical Lens

This steady retreat of state Social Security taxes is more than a fiscal detail; it's a competitive dynamic with clear financial consequences. The trend mirrors past shifts in state tax policy, where jurisdictions have adjusted to attract mobile populations and economic activity. The eight remaining states are now under pressure to follow suit, as the broader market for retirees grows more selective.

For retirees, the strategic calculus is straightforward. The tax burden acts as a direct cost of residence, influencing both current spending and long-term planning. Historical patterns show that people respond to such incentives. When states like West Virginia began phasing out its tax, it created a clear signal that could prompt a migration of retirees seeking to preserve more of their benefits. Even within the eight states, the variation in income thresholds-like Colorado's age-based deductions or Connecticut's 35% cap for higher earners-adds a layer of complexity that savvy planners must navigate. The result is a market for state residency that rewards tax friendliness, much like past competition over corporate tax rates or sales tax exemptions.

This competitive pressure has a tangible impact on local economies. As state tax burdens on retirees fall, their disposable income rises. That extra cash supports higher consumption in those states, acting as a potential tailwind for local businesses and services. The reduction in state tax liabilities for a typical retiree, whose monthly benefit is around $1,976, can translate directly into more spending power. This dynamic is a classic example of how fiscal policy shapes economic behavior, with retirees effectively voting with their feet and their wallets.

The bottom line is one of adaptation. For retirees, it means a more complex but also more strategic landscape for tax planning and potential relocation. For the broader market, it underscores the importance of state-level fiscal policy as a factor in regional economic growth. The historical pattern is clear: states that fail to adjust to this competitive pressure risk ceding economic activity to more favorable jurisdictions.

Catalysts and What to Watch

The trend toward eliminating state Social Security taxes is now in a clear testing phase. The first major data point will come in 2027, when taxpayers file their returns for the 2026 tax year. This will be the first full year of West Virginia's 100% exemption, providing a concrete look at the revenue impact and the number of retirees who actually benefit. Analysts will watch for any reported shifts in retiree migration patterns or state budget adjustments, offering a real-world test of the policy's effectiveness and political cost.

Beyond West Virginia, the key catalyst to watch is legislative momentum in the remaining seven states. The state's phased approach-starting with a 35 percent cut in 2024 and building to full exemption-demonstrates a practical compromise that balanced fiscal caution with retiree appeal. This model could inspire similar proposals elsewhere. Any new legislative efforts in states like Connecticut or Colorado to adopt a multi-year phase-out would signal that the competitive pressure is building, moving the trend from a few outliers to a broader regional shift.

Finally, monitor the trajectory of the average Social Security benefit itself. The typical retired worker now receives about $1,980.86 per month. As these benefits rise with cost-of-living adjustments, the dollar impact of any state tax-regardless of the rate-grows proportionally. A 10% state tax on a $2,000 monthly check is a $200 monthly hit, but on a $2,500 check, it becomes $250. This dynamic amplifies the financial incentive for states to eliminate the tax, turning a symbolic policy into a more significant fiscal and competitive issue.