Social Security is the cornerstone of most Americans’ retirement plans. Without this crucial benefit program, nearly 40% of Americans aged 65 and older would find their incomes falling below the federal poverty line, according to the Center on Budget and Policy Priorities.
The impact of retaining all of their Social Security benefits versus losing even a portion can be immense for these households. Even those who enter retirement on a strong financial footing usually find that retirement benefits plays a significant role in their budgets.
9 States with income taxes on Social Security
Regrettably, for residents of nine states, depending on their incomes, there’s a possibility they will owe state income taxes on a portion of their Social Security benefits this year. This can further complicate financial planning for retirees, making it essential to understand the specifics of how Social Security benefits are taxed.
Anyone collecting Social Security must be aware of the details regarding how the federal government taxes their benefits. This knowledge is crucial for effective financial planning and ensuring that there are no surprises come tax season.
- Social Security is vital for the financial stability of retirees.
- Without it, many seniors would fall below the federal poverty line.
- Even financially secure retirees rely on Social Security for a significant portion of their income.
- Residents of nine states may owe state income taxes on their Social Security benefits.
Being well-informed about the taxation of Social Security benefits can help you make better financial decisions and secure your retirement. Make sure you know the specifics of your state’s tax laws to avoid any unexpected financial burdens.
Understanding how your Social Security benefits are taxed can be crucial for effective financial planning during retirement. If your “combined income” exceeds specific thresholds, the federal government will tax a portion of your Social Security benefits. Let’s break down what this means and how it impacts you.
What is Combined Income?
Combined income is a special metric used solely to determine Social Security taxes. It is calculated as:
- Half of your Social Security income
- Your adjusted gross income
- Any untaxed interest income
Taxable Portion of Benefits
Based on your combined income, a portion of your Social Security benefits may be subject to taxation. Here’s how it works:
For Individuals
- 0%: Less than $25,000
- Up to 50%: $25,000 to $34,000
- Up to 85%: $34,001 and up
For Married Couples Filing Jointly
- 0%: Less than $32,000
- Up to 50%: $32,000 to $44,000
- Up to 85%: $44,001 and up
source: SSA
Why These Thresholds Matter
You might find these thresholds surprisingly low, and you wouldn’t be alone. Congress has not adjusted these limits for inflation in over 30 years, and there are currently no plans in Washington to change this.
As a result, with cost-of-living adjustments to benefits happening almost every year, an increasing number of retirees are finding that some portion of their Social Security benefits is subject to taxation.
Being aware of these thresholds and how they affect your benefits can help you plan better and make informed financial decisions for your retirement. Understanding the nuances of Social Security taxation can make a significant difference in your financial well-being.
Thorough planning can help you duck an unexpected tax bill come in April 2025. If you’re a retiree collecting Social Security benefits, it’s important to consider how additional capital gains or withdrawals from retirement accounts might impact your overall tax obligations. However, if you reside in one of nine specific states, you’ll have an extra consideration to be mindful of.
9 States That Tax Social Security
Most states do not tax Social Security benefits, and fortunately, the number of states that do has been decreasing. For instance, Kansas has recently eliminated its tax on Social Security, effective from the 2024 tax year.
Nevertheless, there are still nine states that impose income taxes on certain individuals’ Social Security benefits. If you reside in one of these states, it’s crucial to take the time to research your personal situation or consult a professional. Understanding your state’s tax laws can help you explore potential ways to reduce your tax burden.
States to Watch
If you live in one of these states, make sure you stay informed:
- Colorado
- Connecticut
- Kansas
- Minnesota
- Missouri
- Montana
- Nebraska
- New Mexico
- Utah
By being proactive and informed, you can better manage your finances and minimize any potential tax surprises. Always consider consulting a tax professional to guide you through the complexities and ensure you’re making the best decisions for your retirement.
Understanding the tax implications of Social Security benefits in different states is crucial for both current and future retirees. Here, we break down the basics for Colorado, Connecticut, and Minnesota.
Colorado
In Colorado, the tax treatment of Social Security benefits varies based on age and income:
- Under 65: Taxpayers who have more than $20,000 in taxable benefits on their federal income tax return will owe state income taxes on the amount exceeding that threshold.
- 65 or older: Retirees are exempt from state taxes on Social Security benefits.
The state tax rate in Colorado is 4.4 percent.
Connecticut
For residents of Connecticut, the taxation of Social Security benefits depends on your adjusted gross income (AGI):
- If your AGI exceeds $75,000 for individuals or $100,000 for joint filers, the portion of your Social Security income that is taxed at the federal level may also be subject to state taxes.
- However, only up to 25% of your benefits can be taxed by the state, regardless of the federal taxation percentage.
The state tax rate in Connecticut ranges from 2 percent to 4.5 percent.
Minnesota
Minnesota offers specific deductions for Social Security benefits, but these deductions are phased out at higher income levels:
- Individuals can deduct up to $4,560, and married couples filing jointly can deduct up to $5,840 from their taxable income.
- These deductions start to phase out for incomes above $69,250 for individuals and $88,630 for married couples. They phase out completely at combined incomes of $78,000 for individuals and $100,000 for married couples.
The income tax rate in Minnesota ranges from 6.8% to 9.85%.
When considering retirement and Social Security benefits, understanding the impact of state taxes is crucial. Below, we explore how states like Montana, New Mexico, and Rhode Island handle the taxation of Social Security income.
Montana
In Montana, any portion of your Social Security income that is taxed at the federal level will also be subject to state income tax. The tax rate in Montana ranges from 4.7% to 5.9%.
New Mexico
For residents of New Mexico, if your adjusted gross income exceeds $100,000 for individuals or $150,000 for married couples filing jointly, you will owe state taxes on any Social Security income that is also taxed at the federal level. The state tax rate in New Mexico ranges from 4.9% to 5.9%.
Rhode Island
In Rhode Island, taxpayers who have not yet reached their full retirement age as defined by Social Security and have adjusted gross incomes above certain thresholds will owe taxes on any portion of Social Security income that is also taxed federally. For 2023, these thresholds were $101,000 for individuals and $126,250 for married couples filing jointly, but these figures are adjusted for inflation yearly. The state tax rate ranges from 4.75% to 5.99%.
When evaluating the effect of state taxes on your Social Security income, it’s crucial to understand the specific guidelines and rates for your state. Below is an overview of how Utah, Vermont, and West Virginia handle these taxes, ensuring you are well-informed and can plan accordingly.
Utah
In Utah, taxpayers with an adjusted gross income exceeding $45,000 for individuals or $75,000 for married couples filing jointly will owe taxes on any Social Security income that is taxed at the federal level. For those below these thresholds, a credit is available to offset the taxes. The tax rate in Utah is a flat 4.65%.
Vermont
Vermont imposes taxes on Social Security income for taxpayers with adjusted gross incomes above $50,000 for individuals or $65,000 for married couples filing jointly. This means at least a portion of any Social Security income included in your federal income tax return will be taxed. The tax rate in Vermont varies, ranging from 3.35% to 8.75%.
West Virginia
In West Virginia, 65% of any Social Security income included in your federal income tax return is subject to state income tax. However, this is gradually being phased out. By 2025, only 35% will be taxable, and starting in 2026, the state will no longer tax these benefits. The tax rate in West Virginia ranges from 2.55% to 5.525%.
Think Beyond Taxes
While it’s true that retirees in certain states may face additional taxes, focusing on the bigger picture is essential for a fulfilling retirement. Remember, you are hopefully planning for a long retirement, and tax policies in states can change significantly over time. In recent years, many states have taken steps to reduce or eliminate taxes on Social Security.
There are more important considerations when choosing your retirement destination:
- Cost of Living: This can have a significant impact on your quality of life and financial stability.
- Community Offerings: Look for what a community can offer in terms of amenities, healthcare, recreational activities, and social opportunities. These factors can greatly influence your ability to enjoy your retirement.
These elements can have a much more substantial impact on your ability to live comfortably than a few state tax dollars.
Strategies to Lower Your Tax Bill
There are numerous ways to minimize your tax obligations in retirement without relocating:
- Plan in Advance: Early and effective planning can help you navigate tax liabilities.
- Utilize Roth Retirement Accounts: These accounts can be a strategic tool in managing your taxable income.
- Manage Capital Gains and Losses: Smart management of your investments can help you avoid unnecessary taxes and retain more of your retirement income.