A Major Change Could Be Coming For Social Security In Some States
Changes to Social Security can often be underwhelming. For example, the 2026 COLA Increase proved to be lackluster for many retirees, and the recent Social Security improvements may only help in limited ways. But a positive bit of news to emerge was the One Big Beautiful Bill Act's (OBBBA) additional senior tax deductions aimed at curbing federal taxes on Social Security benefits. Under the bill, taxpayers over the age of 65 can stack an additional deduction of $6,000 for individual filers and $12,000 for couples filing jointly for the 2025 to 2028 tax years. But according to CNBC, another change may be coming, as the American Association of Retired Persons (AARP) is leading the charge to end these state-level taxes.
Currently, a majority of the states do not tax Social Security. However, Colorado, Connecticut, Minnesota, Montana, New Mexico, Rhode Island, Utah, and Vermont still do. West Virginia is in the process of phasing out Social Security taxes. Meanwhile, Rhode Island and Minnesota made an effort to eliminate these taxes, but in both states, the legislation has stalled for now.
Does no tax on Social Security benefit retirees?
In general, eliminating state and federal taxes on Social Security benefits retirees by increasing their disposable income. Having more disposable income can afford individuals and households greater financial flexibility and a better quality of life during the golden years. However, many retirees may already be seeing such benefits. The federal government taxes Social Security on a sliding scale. The Internal Revenue Service (IRS) looks at adjusted gross income, non-taxable interest, and 50% of Social Security benefits. If the sum is under $25,000, retirees are not taxed. However, if it is over that amount, they are taxed on 50% to 85% of their benefits. (If you're still confused, here's our guide to find out if you pay taxes on Social Security.) Retirees who live in one of the 43 states with no state tax on Social Security and who leverage the OBBBA senior tax deductions may already be optimizing their taxes.
Meanwhile, even if they had passed into law, the proposals to eliminate taxes in Rhode Island and Minnesota might not have provided quantifiable benefits for the average retiree. In Rhode Island, 75% of the benefits from the proposal to eliminate taxes on Social Security would have benefited individuals in the top 20%, with incomes above $151,000, according to The Economic Progress Institute. And in Minnesota, more than half of the Social Security tax cuts would have gone to households with an income above $143,000, per the Minnesota Budget Project.