The landscape of Social Security taxation varies dramatically across America, with retirement finances potentially shifting by thousands of dollars depending on where you call home. As we approach 2026, significant changes to state-level Social Security tax policies are creating both challenges and opportunities for retirees nationwide.
Having tracked these developments closely for Epochedge, I’ve observed a clear migration pattern among retirees seeking tax advantages. Many are voting with their moving trucks, heading to states where their retirement benefits remain untouched by state income taxes.
“We’re seeing an acceleration of retirees relocating specifically for tax purposes,” notes Marcus Stevenson, retirement planning specialist at Fidelity Investments. “The difference in take-home income can be substantial enough to justify the disruption of relocation.”
The Changing Tax Landscape
Currently, 37 states and the District of Columbia completely exempt Social Security benefits from state income taxes. However, the remaining 13 states impose various levels of taxation, with rules often changing year by year as legislatures respond to demographic shifts and budget pressures.
Minnesota and Vermont, for instance, have recently joined the trend of reducing their tax burden on retirees. According to data from the National Conference of State Legislatures, nine states have enacted legislation since 2020 to reduce or phase out taxes on retirement benefits, reflecting increased competition for retiree residents.
From my conversations with financial advisors across the country, this shifting landscape creates both opportunities and confusion. Many retirees aren’t aware how dramatically their finances might improve by crossing state lines.
States Moving Toward Full Exemption
Several states are in transition, gradually reducing their tax burden on Social Security recipients by 2026:
Connecticut, which currently taxes Social Security benefits for individuals with federal adjusted gross income above $75,000 ($100,000 for joint filers), has legislation in place that will completely exempt all benefits by 2026.
Colorado legislators passed reforms that will increase exemption thresholds substantially, effectively removing taxes for approximately 85% of benefit recipients by 2026.
“The competition for retiree dollars is becoming fierce,” explains Dr. Elizabeth Chen, economist at the Urban Institute. “States recognize that retirees bring stable income streams without requiring extensive public services or infrastructure investment.”
This interstate competition creates leverage for retirees. Those willing to relocate can effectively negotiate with their wallets, choosing jurisdictions that optimize their retirement income.
The Persistent Taxers
Despite the national trend toward exemption, several states show no indication of changing their taxation policies by 2026:
Montana applies its income tax rates to Social Security benefits using a complex formula that parallels federal taxation rules.
Utah continues taxing benefits with a modest retirement tax credit that doesn’t fully offset the burden for many recipients.
Nebraska taxes Social Security according to income thresholds that don’t adjust automatically for inflation, creating a stealth tax increase over time.
Rhode Island taxes Social Security for those exceeding specific income thresholds ($86,350 for individuals in 2023, adjusted annually).
My analysis of legislative agendas and budget projections in these states suggests minimal likelihood of significant relief before 2026. Their budget structures remain heavily dependent on retirement income taxation.
Federal Taxation Overlay
Understanding state taxation is only half the equation. Federal taxation of Social Security benefits remains unchanged since 1983, with thresholds that have never been adjusted for inflation:
- Individual filers with combined income between $25,000 and $34,000 may pay taxes on up to 50% of benefits
- Individual filers with combined income above $34,000 may pay taxes on up to 85% of benefits
- Joint filers with combined income between $32,000 and $44,000 may pay taxes on up to 50% of benefits
- Joint filers with combined income above $44,000 may pay taxes on up to 85% of benefits
These unadjusted thresholds create what economists call “bracket creep,” where inflation pushes more retirees into higher tax categories without any actual increase in purchasing power.
“The federal thresholds are from a different era,” observes William Patterson, former Deputy Commissioner at the Social Security Administration. “In today’s dollars, those limits would be roughly twice as high if they’d been indexed to inflation.”
Strategic Planning for 2026
For those approaching retirement or considering relocation, several strategies emerge from my research and industry conversations:
Understand the full tax picture, including property taxes, sales taxes, and estate taxes, not just income taxes on Social Security. Some states with no income tax compensate with higher taxes in other categories.
Consider proximity to healthcare facilities, family members, and lifestyle amenities alongside tax advantages. The lowest-tax state might not provide the quality of life that makes retirement enjoyable.
Evaluate timing carefully. Some state exemptions are phasing in gradually, creating optimal windows for relocation.
Consult with financial advisors familiar with interstate tax planning. The complexities of domicile rules, part-year resident returns, and benefit calculation formulas often require professional guidance.
“We recommend clients think beyond immediate tax savings,” suggests Patricia Morales, CFP with Raymond James. “The most tax-efficient state may not be the most cost-effective when considering housing costs, healthcare access, and travel expenses to visit family.”
Looking Beyond 2026
The long-term trajectory points toward broader exemption of Social Security benefits from state taxation. Demographic pressures from aging populations create powerful voting blocs advocating for retirement-friendly policies.
However, state budget constraints may slow this progression, particularly in states with limited revenue sources or declining working-age populations. The competition for retiree residents will likely intensify as the baby boomer generation fully exits the workforce.
The wisest approach combines flexibility with informed planning. Understanding how your benefits might be taxed differently across state lines provides powerful leverage in retirement planning—potentially preserving thousands in annual income simply by understanding these complex but consequential state tax rules.
