Understanding Social Security Taxation: Does New Mexico Tax Social Security?

Quick Answer: New Mexico’s Tax Policy on Social Security

If you’re receiving Social Security benefits in New Mexico, you’re among the fortunate retirees. New Mexico does not tax Social Security benefits, making it one of nine states that have eliminated or never implemented such taxation. This means residents can keep their full Social Security income without worrying about state-level taxes on these benefits.

However, there’s an important distinction to understand: while New Mexico protects your benefits from state taxation, the federal government maintains its own rules that could still affect your after-tax income.

The Nine States Without Social Security Taxes

The list of states currently exempting Social Security from taxation includes:

• Colorado
• Connecticut
• Minnesota
• Montana
• New Mexico
• Rhode Island
• Utah
• Vermont
• West Virginia

This landscape is gradually shifting. West Virginia, for instance, has announced plans to completely phase out its Social Security tax beginning in 2026. As more states recognize the economic benefits of attracting and retaining retirees, expect additional states to follow suit in the coming years.

Don’t Overlook Federal Taxation Rules

The critical mistake many retirees make is assuming state tax exemption means full tax freedom. This is incorrect. Regardless of your state’s policy on Social Security taxation—including New Mexico’s favorable stance—federal income tax rules still apply to your benefits.

The IRS determines your tax liability based on what’s called your “combined income,” calculated as:

• Your adjusted gross income (AGI)
• Plus 50% of your annual Social Security benefits
• Plus any nontaxable interest (such as from Treasury bonds)

Using a concrete example: if your AGI reaches $10,000, you receive $20,000 in annual Social Security benefits, and you earn $500 in tax-exempt interest, your combined income totals $20,500 ($10,000 + $10,000 + $500).

Federal Tax Brackets for Social Security Benefits

Your combined income determines what percentage of your Social Security is taxable:

For single filers:

• Combined income between $25,000–$34,000: up to 50% of benefits are taxable
• Combined income exceeding $34,000: up to 85% of benefits are taxable

For married couples filing jointly:

• Combined income between $32,000–$44,000: up to 50% of benefits are taxable
• Combined income exceeding $44,000: up to 85% of benefits are taxable

Any portion of your benefits deemed taxable gets added to your other income sources and taxed at your ordinary income tax rate. For example, if $15,000 of your $20,000 in benefits qualifies as taxable, that amount combines with your other income before standard taxation applies.

Strategic Planning for New Mexico Retirees

Living in New Mexico provides a tax advantage, but it shouldn’t be your only consideration when planning retirement finances. Understanding both your combined income threshold and the federal taxation formula helps you optimize your overall tax situation. Consider consulting a tax professional to structure your retirement income strategically and potentially maximize the benefits you keep.