By Fred Nathan, Executive Director, Think New Mexico

As New Mexico seniors file their annual income tax returns, many may be pleasantly surprised to discover that they are no longer paying state taxes on their Social Security income.

The 2022 tax year marks the first time Social Security income is exempt from New Mexico income tax since 1990, when the legislature first began taxing it. That tax was enacted as a single line on the second to last page of a long and complex piece of legislation. It received no public scrutiny until seniors began filing their taxes the following year.

Think New Mexico unearthed this history in 2019, when we published a policy report, “Solving the Hidden Crisis: Achieving Retirement Security for All New Mexicans,” which documented the history and impact of New Mexico’s tax on Social Security income. In that report, we recommended that the state repeal the tax as part of a larger strategy to enhance retirement security for New Mexico seniors.

The reform was urgently needed, as a 2018 UNM study found that two out of every three private sectors workers in New Mexico have no money saved for retirement, and will be relying heavily or exclusively on Social Security. Only 11 states tax Social Security income.

Last year, after a three-year effort, the legislature passed and the governor signed a law exempting all lower and middle income seniors – with incomes up to $100,000 for individuals and $150,000 for couples – from paying taxes on their Social Security. Prior to that law, the state taxed the Social Security income of seniors with incomes as low as $28,500. The reform took effect with the 2022 tax year, so seniors will see the savings in the tax returns they are currently filing.

The New Mexico Taxation and Revenue Department estimated that approximately 115,000 of the 137,000 New Mexicans who previously paid taxes on their Social Security income, about 84%, are now eligible for the exemption. The average New Mexico senior who is currently paying taxes on their Social Security is saving approximately $710 a year as a result of this reform.

However, New Mexico’s tax exemption for Social Security income had one significant flaw: Think New Mexico failed to persuade the legislature to include an inflation adjuster. If the exemption levels are not indexed for inflation, over time the value of the exemption will erode and the tax will apply to more and more seniors.

This is exactly what happened when the federal government began taxing Social Security income in 1983. That federal law exempted seniors with annual incomes of incomes under $25,000 – the equivalent of about $76,000 today. However, because the income level of the exemption was not indexed for inflation, it remained at $25,000 and today the federal tax is imposed on millions of middle and lower income seniors.

Thankfully, this year the legislature passed and the governor will likely sign legislation indexing New Mexico’s Social Security exemption levels for inflation. This means that those levels will rise over time, ensuring that middle and lower-income seniors will continue to be shielded from this tax.

Protecting middle and lower-income seniors is particularly important for the 55,000 grandparents who are the primary guardians for their grandchildren. More than one out of every ten children in New Mexico is being raised by their grandparents, and many of these seniors are sacrificing to meet the financial needs of their grandchildren and worrying about outliving their savings.

The tax exemption, with the inflation adjuster, also makes New Mexico a more attractive place for middle income retirees to retire, on top of our state’s natural beauty, affordable cost of living, and plentiful cultural and recreational amenities. In fact, New Mexico’s Social Security tax exemption was highlighted by MoneyTalks News in its recent article on “12 Great Places to Retire in the Mountains.”

Think New Mexico commends the legislature and Governor Lujan Grisham for providing this meaningful tax relief and enhancing the financial security and well-being for New Mexico’s seniors and their families.