With the new year upon us, several states are implementing significant changes to their tax landscapes. As Kiplinger has reported, those key 2025 state tax changes can impact everything from your take-home pay to your tax bill, ranging from income tax cuts and property tax relief to increased gas taxes in some places.
In a couple of cases, states have revamped taxes on Social Security benefits. These changes, effective as of January 1, could put more money in the pockets of older adults and other beneficiaries at a time when the debate over federal taxes on Social Security income is also heating up.
Here’s more of what you need to know.
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Tax on Social Security income
First, keep in mind that up to 85% of your Social Security benefits can be subject to tax at the federal level. However, when it comes to states, taxes on Social Security benefits vary widely.
While most states don't tax these benefits, a handful do, each with its own rules and exemptions. In states that tax Social Security, the approach ranges from full taxation to partial exemptions based on age or income.
These differences affect a retiree's disposable income, potentially influencing decisions about the best places to retire. So, as states revise their tax policies, staying informed about these changes becomes crucial for effective retirement planning.
Does West Virginia tax Social Security income?
The Mountain State is completely phasing out its tax on Social Security benefits by 2026. The move, initiated by legislation passed in March 2024, represents a significant policy shift. Some proponents say it will make West Virginia more attractive to retirees and ease the financial burden on its aging population.
Starting this year, 2025, West Virginia residents will see more than a one-third reduction in the amount of Social Security income subject to state tax. This gradual phase-out is designed to give the state budget time to adjust while providing immediate relief to Social Security recipients.
Here is the phase-out schedule:
Tax Year 2024: 35% reduction in taxes on Social Security income
Tax Year 2025: 65% reduction
Tax Year 2026: 100% elimination of taxes on Social Security income
Note: This phase-out applies to all Social Security recipients residing in West Virginia, regardless of income level. Estimates are that 50,000 people will be impacted. (Previously, only those with federal adjusted gross incomes below $50,000 for single filers or $100,000 for joint filers were exempt from state taxes on their Social Security benefits.)
Colorado Social Security tax exemption
While not eliminating Social Security taxes entirely, Colorado is reducing its tax burden on a broader range of beneficiaries.
The Centennial State's approach focuses on expanding exemptions to include younger recipients, acknowledging that Social Security isn't just for those of traditional retirement age.
- Beginning in the 2025 tax year, Colorado residents age 55 to 64 can deduct all their Social Security benefits from their state taxable income, provided their adjusted gross income (AGI) falls below certain thresholds.
- The AGI limit for individual filers is $75,000, while couples filing jointly can earn up to $95,000 and still qualify for the full deduction.
This change is particularly significant for Coloradans who receive Social Security benefits earlier due to disability or surviving spouse status.
Ending taxes on Social Security benefits: The big picture
The tax changes in West Virginia and Colorado reflect a broader national trend toward reducing or eliminating state-level taxes on Social Security benefits. (As of 2025, nine states will continue to tax these benefits, down from 13 in recent years.)
At the state level, that shift is partly due to increasing pressure to make states more retiree-friendly for taxes and financial challenges due to the rising cost of living.
These tax changes could mean more monthly money for Social Security recipients in West Virginia and Colorado. While the amounts may seem modest individually, the extra income can affect quality of life, especially for those on fixed incomes.
Meanwhile, on the federal level, ending taxes on Social Security was a key feature in the 2024 presidential campaign. There have been mixed reactions to the proposal floated by now-President-elect Donald Trump and similar proposals from other lawmakers on both sides of the political aisle.
- Some fear that eliminating federal taxes on Social Security benefits could lead to the trust fund's insolvency sooner than expected.
- Not taxing that income could also result in a significant loss of federal revenue — by some estimates, approximately $1.8 trillion over the next decade.
- That could put pressure on Social Security and Medicare funding, ultimately affecting the benefits available to millions of retirees.
It's worth noting that significant changes to Social Security may require a supermajority vote in the U.S. Congress, especially when proposed changes would substantially reshape the program's core structure or funding mechanisms.
(That higher vote threshold helps ensure that fundamental policy shifts involving the program receive thorough consideration and broad bipartisan support.)
But stay tuned: whatever happens with taxes on Social Security income, 2025 will be a key year for several potentially significant federal tax changes that could impact you.
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