This is a story I heard at a local brunch spot last weekend. A retired person at the next table was surprised when they filed their state taxes last year. They found out that state tax was applied to their social security benefits.

I thought New Mexico had an exemption for social security taxes. That's what I believed too. So, as soon as I got home, I looked it up.

To cut to the chase, the exemption is indeed correct. However, there are conditions attached. If you're unaware of these conditions, you might end up like that person.

New Mexico changed the law in 2022 to start excluding social security income from state income tax. This took effect from the 2022 tax year.

The issue lies with the income threshold. The benchmark is the federal adjusted gross income, commonly referred to as AGI.

For married couples filing jointly, the AGI must be below $150,000. The same $150,000 threshold applies for head of household and surviving spouse filings.

For singles, it's below $100,000. For married individuals filing separately, it's $75,000.

Here's the crucial point. This is not a gradual reduction. It's either all or nothing.

If you're below the threshold, the entire amount of social security benefits is excluded from state taxable income. But if you exceed the threshold by even $1, there's no deduction at all. Isn't that scary?

The moment you exceed the threshold, the amount of social security benefits that are taxable federally is included in New Mexico taxable income. If both spouses receive benefits, that amount can be quite significant.

One more thing to note: this is about state tax. Federal income tax can still apply to social security benefits regardless of New Mexico's exemption. Many people confuse the two.

A similar example was mentioned in an Albuquerque Journal column. A single person with an AGI of $99,500 has all their social security benefits exempt, but at $101,000, the deduction is zero.

The same applies to couples. An AGI of $149,000 and $151,000 shows only a $2,000 difference in income, yet the outcome is completely different.

So why do people exceed the threshold more easily than expected? It's because there are many components that contribute to AGI.

The portion of social security benefits that is taxable federally counts toward AGI. Withdrawals from pensions, 401(k)s, or IRAs also count.

Gains from selling stocks or real estate also increase AGI. Even a Roth conversion in a given year raises AGI by that amount.

This means that a couple who usually has an AGI around $130,000 could easily exceed the threshold if they withdraw a large sum from their IRA one year. The person at the brunch spot was likely in a similar situation.

Couples where one spouse is still working need to be especially cautious. Combining salary and pension can quickly reach $150,000.

Therefore, if you're near the threshold, it's a good idea to check your numbers before the end of the year. Since it's the end of October, now is the perfect time. After December 31, you can't adjust this year's numbers.

If I were in your shoes, I would first look at the AGI line on last year's federal tax return, Form 1040. Then, I would add any increased withdrawals or sales to estimate this year's AGI.

If you're close to the threshold, see if you can defer large withdrawals or Roth conversions to next year. There are also ways to spread withdrawals over several years.

If you're subject to required minimum distributions (RMDs), consider qualified charitable distributions (QCDs). Amounts sent directly from an IRA to a charity do not count toward AGI.

Of course, everyone's situation is different. Since this ties into federal taxes and Medicare premiums, be sure to consult a tax professional.

For reference, there are ongoing proposals to eliminate the threshold. In the 2026 session, SB 156 was introduced to remove the income cap.

There's also HB 92, which suggests gradually increasing the exemption rate for those above the cap. This proposal aimed for full exemption by 2036.

However, I couldn't confirm that these bills have passed within my research scope. So, for now, it's safest to plan according to the existing threshold.

You can check the latest guidelines on the New Mexico Taxation and Revenue Department website. It's also mentioned in the PIT-ADJ form instructions for state income tax returns.

Honestly, I find this cliff-like structure quite odd. Losing all benefits just for earning an additional $2,000 seems strange to me.

That said, there's a valid argument that removing the cap entirely could create a hole in state finances. Gradually reducing it might be a middle ground.

Still, rules are rules. If you know and prepare, you can avoid this trap. It's a hundred times better than being surprised by a bill in April.

As you watch the Sandia Mountains turn watermelon-colored at sunset, take a moment to plan for the end of the year. A single dollar can make a difference in taxes. Those who prepare in advance will come out ahead!