I Live in a State That Taxes Social Security — How That’s Affected My Retirement Savings
Written by
Laura Beck
Edited by
Gary Dudak
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If you didn’t know that some states tax Social Security and were, frankly, shocked by this fact, you’ve come to the right place. GOBankingRates spoke to Helen Y., a retiree who lives in Colorado — one of the few states that tax Social Security benefits (with exceptions). It was a rude awakening to the 73-year-old former creative director.
“Unlike a lot of my peers in the creative world, I’d been saving for retirement for decades,” Helen said. “But somehow I fully missed that Colorado taxes that money.”
Colorado is one of states that still tax Social Security benefits, albeit with some exemptions. For retirees like Helen, this means carefully considering how these taxes affect their retirement income and savings strategies.
Also see how much money you’ll need to supplement Social Security in every state.
The Surprise of State Taxes
When Helen learned about Colorado’s taxation of Social Security benefits, she was taken aback. “I knew about federal taxes on Social Security, but state taxes? That was news to me,” she said.
Currently, those who are 65 or older in Colorado can fully deduct Social Security benefits from their state income, per AARP, but that was a recent change in Colorado’s tax law. Helen retired at a time when Social Security was taxed for those 65 and older — and a portion of Social Security is still taxed for people under 65. For Helen, who was 67 when she retired, this meant she still had to pay state taxes on a portion of her benefits.
“It wasn’t a huge amount, but when you’re living on a fixed income, every dollar counts,” Helen explained. “I had to recalibrate my budget and savings strategy to account for this additional tax burden.”
Adapting the Retirement Plan
Helen realized she needed to make some adjustments — and fast. Here’s what she did.
She increased her savings by working an extra year. “I really didn’t want to, but hey,” Helen said. “It allowed me to up my savings and gave me a nice chunk of extra change to play around with.”
She also diversified her income streams so she didn’t have to fully rely on Social Security. “I put even more into annuities, high-interest savings accounts and stocks to supplement my income,” she said. “Thank goodness by daughter knows all about this stuff, or I’d be up the creek.”
While Helen ultimately decided to stay in Colorado, she did consider a move. “I thought about New Mexico,” she said. “But in the end, moving costs money and my whole world is here. It just wasn’t worth it.”
The Impact on Retirement Lifestyle
Despite being actively involved with her retirement journey, Helen said state taxes on her Social Security benefits did affect her lifestyle.
“I had to be more mindful of my spending,” she shared. “Which, to be honest, sucked. I was so looking forward to visiting my kid who lives in London, and I had to ask him to buy the plane ticket for me. It’s embarrassing.”
Because of this, Helen also became more engaged in local politics, advocating for changes to Colorado’s tax laws. “I don’t know… I’m retired and have time on my hands,” she said. “Might as well use it for good, I say!”
Lessons Learned
Of course, hindsight is 20/20, and it’s impossible to go into the past to change your present. However, Helen still wishes she would’ve been a little more informed. “If I had known just a little bit earlier, I might have changed how I did things,” she said. “But I can’t kick myself too much about it. You live, you learn, as they say.”
Helen does have advice for people approaching retirement, though.
“Do your homework, I beg of you,” she said. “What I mean when I say that is you need to understand not just federal taxes, but state and local taxes. It’s a lot. And ask your friends and family for help — they might know more. Especially people who are a little older than you and in the same area! They are a wealth of information. Just ask! Heck, I want people to ask me!”
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