Is Social Security Taxable in Nebraska?

Social Security benefits are a source of income for many individuals in retirement. While these benefits are often subject to federal income tax based on a recipient’s total income, each state maintains its own regulations regarding their taxation. Understanding these state-specific rules is important for effective financial planning. This article will focus on Nebraska’s approach to the taxation of Social Security income.

Nebraska’s General Approach to Social Security Taxation

Historically, Social Security benefits were included in a taxpayer’s adjusted gross income (AGI) when calculating Nebraska state income tax, mirroring their initial treatment at the federal level. This meant that for many years, a portion of Social Security income could be subject to state taxation in Nebraska, depending on the taxpayer’s overall income. However, Nebraska has recently implemented significant legislative changes aimed at altering this long-standing practice.

These legislative efforts sought to reduce and eventually eliminate the state income tax burden on Social Security benefits for its residents. While Social Security benefits were initially part of the taxable income base, specific provisions have been enacted to provide relief.

Specific Eligibility for Social Security Income Exemption

Nebraska has enacted Legislative Bill (LB) 873 to phase out and ultimately eliminate the state income tax on Social Security benefits. For tax years beginning on or after January 1, 2025, Social Security benefits are entirely exempt from Nebraska state income tax. This means that, starting with the 2025 tax year, taxpayers will no longer pay state income tax on their Social Security income, irrespective of their federal adjusted gross income (AGI).

The full exemption in 2025 follows a phased-out approach that began in 2022. For taxable years starting on or after January 1, 2022, and before January 1, 2023, 40% of Social Security benefits were exempt. This increased to 60% for the 2023 tax year and 80% for the 2024 tax year. During this phase-out period (2022-2024), taxpayers could claim either the percentage reduction provided by LB 873 or the previously existing full exemption for low-income recipients, choosing whichever provided the greater tax benefit. The legislative intent was to ensure a complete exemption by 2025, benefiting all Social Security recipients in Nebraska.

Reporting Social Security Income on Nebraska Tax Returns

Taxpayers claiming the Social Security income exemption on their Nebraska state income tax return will need to utilize specific forms. The primary form for individual income tax in Nebraska is Form 1040N. This form is used by residents, partial-year residents, and nonresidents to calculate their state tax liability.

To claim the Social Security exemption, taxpayers typically refer to Nebraska Schedule I, titled “Nebraska Adjustments to Income.” This schedule provides lines for various additions to and subtractions from federal adjusted gross income for Nebraska tax purposes. The amount of exempt Social Security income is entered as a subtraction on this schedule, thereby reducing the taxpayer’s Nebraska taxable income. Taxpayers should use the information provided on their federal Social Security Benefit Statement, Form SSA-1099, and their federal income tax return to accurately complete the relevant sections on Nebraska Form 1040N and Schedule I.