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Social Security plays a vital role in the financial stability of many American seniors. Recent data from a Gallup poll indicates that 60% of retirees consider this government program a primary income source, while an additional 28% rely on it as a supplementary income stream.
To maximize your Social Security benefits is crucial for the approximately 60 million Americans receiving these retirement payments. However, retirees in nine states face the risk of losing a portion of their monthly checks, as state governments impose taxes on Social Security benefits based on income, potentially reducing the amount they retain by nearly 10% in certain instances.
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Understanding the federal taxation of Social Security benefits is essential before examining the specific tax policies of various states.
The IRS assesses a metric known as “combined income” to evaluate how much of your Social Security benefits may be taxable. This combined income includes half of your Social Security income, alongside your adjusted gross income and any untaxed interest income. If your combined income crosses a certain threshold, up to 85% of your Social Security benefits may count as taxable income on your federal returns.
Taxable Portion of Benefits
| Combined Income, Individual | Combined Income, Married Filing Jointly | Tax Rate |
|---|---|---|
| Less than $25,000 | Less than $32,000 | 0% |
| Between $25,000 and $34,000 | Between $32,000 and $44,000 | Up to 50% |
| More than $34,000 | More than $44,000 | Up to 85% |
Data sourced from the Internal Revenue Service highlights that seniors who do not manage to keep their adjusted gross income low may find a significant percentage of their Social Security benefits subject to taxes. This is particularly concerning since Congress has not adjusted the income thresholds for inflation since the rules were established decades ago.
Consequently, an increasing number of seniors find themselves compelled to pay taxes on a portion of their Social Security benefits. This financial strain is particularly pronounced for retirees in nine states.
Over time, the number of states taxing Social Security benefits has decreased. Recently, residents of Missouri, Nebraska, and Kansas welcomed tax relief after new laws were enacted to eliminate taxes on benefits effective from 2024.
If you reside in one of these nine states, you may still be obligated to share a portion of your retirement benefits with your state government. Consulting a tax professional could be beneficial in understanding how state tax law applies to your circumstances and identifying strategies to potentially reduce or eliminate taxes during retirement.
State-Specific Tax Information
Colorado: Seniors aged 65 and above, or those with an adjusted gross income below $75,000 for single filers or $95,000 for joint filers, are exempt from state taxes on Social Security. Those under 65 with higher AGIs can deduct up to $20,000 of their included Social Security income, incurring a 4.4% tax on any excess.
Connecticut: Individuals with adjusted gross incomes below $75,000 or joint filers below $100,000 are exempt from state Social Security taxes. Those with higher AGIs face tax rates ranging from 4.5% to 6.99%, with a maximum of 25% of benefits being taxable.
Minnesota: Taxpayers with adjusted gross income below $84,490 for individuals and $108,320 for married couples are exempt. For income exceeding these thresholds, tax rates range from 6.8% to 9.85%, with benefits subject to tax increasing based on the AGI level.
Montana: Social Security income included in federal taxes is also taxable at the state level. Seniors over 65 can claim an additional deduction, and tax rates vary from 4.7% to 5.9%.
New Mexico: Individuals with adjusted gross income below $100,000, or joint filers below $150,000, are exempt from state taxes on Social Security. Other taxpayers must pay state tax on the income portion in federal taxes, with rates ranging from 4.9% to 5.9%.
Rhode Island: Similar to New Mexico, individuals with gross incomes below $104,200, and joint filers below $130,250 are exempt, while other taxpayers pay state taxes on income included in federal returns.
Utah: Like Montana, all Social Security included in federal income is taxable. However, individuals earning below $45,000 and joint filers below $75,000 may qualify for a tax credit to offset the tax on this income.
Vermont: Individuals with adjusted gross incomes below $50,000 and married couples under $65,000 are exempt from taxes on Social Security. Those with incomes within $10,000 of these limits can receive partial deductions.
West Virginia: Individuals earning below $50,000 and joint filers below $100,000 are exempt. However, a new provision will require taxes on 35% of any Social Security income for higher earners starting in 2025, with complete elimination of this tax in 2026.
When considering retirement, it’s important to recognize that tax rates are just one facet of the financial landscape. While tax policies evolve, other factors—such as housing costs, property taxes, and community amenities—are equally crucial when deciding where to retire.
Moreover, it’s essential to assess the location you are considering for retirement. Areas abundant in senior services and activities may justify higher tax burdens, as they can significantly enhance the quality of life during retirement.
For those focused on minimizing their tax liabilities, strategies can include maximizing contributions to Roth retirement accounts while still employed or converting traditional retirement savings into Roth accounts prior to receiving Social Security. Additionally, taking capital gains may improve your overall tax picture. Consulting with a tax planner can often yield savings that justify the cost of their services. However, effective tax planning for retirement should ideally begin early.
If you find yourself behind on your retirement savings, consider looking into some lesser-known “Social Security secrets.” These strategies might significantly boost your retirement income.
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Retirees in These 9 States Risk Losing Some of Their Social Security Checks was originally published by The Motley Fool.
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