As retirement nears, there are many important factors to consider, including where you want to live. While things like family, friends, or great weather may influence your choice, it’s crucial to look at financial factors as well. One of the most overlooked aspects of Social Security benefits is state-level taxation. Though only ten states currently impose taxes on Social Security payments, knowing how they do this can help you plan for your retirement more effectively.
States Taxing
When planning your retirement, avoiding Social Security taxes might be top of mind. Out of the 50 states, only ten tax Social Security benefits:
- Colorado
- Connecticut
- Kansas
- Minnesota
- Montana
- New Mexico
- Rhode Island
- Utah
- Vermont
- West Virginia
Don’t worry if you live in one of these states; not everyone is required to pay Social Security taxes. Each state has its own criteria to determine who pays taxes and how much. For instance, in Kansas, Social Security is only taxed if your adjusted gross income (AGI) exceeds $75,000. If your AGI is lower, you won’t pay any state taxes on your benefits.
But, keep in mind, state taxes are just part of the story. Even if you live in one of these states, you might still be subject to federal taxes on your Social Security income, which could impact your retirement budget.
Should You Move?
You might be tempted to move to a state that doesn’t tax Social Security, but there’s more to the decision than just avoiding state taxes. You also need to factor in other living costs. For example, housing, healthcare, and food expenses can vary widely between states. Sometimes, even if you don’t have to pay state taxes, the overall cost of living might be higher than in your current location.
The key is to weigh all the factors before making a big decision. Avoiding state taxes might be appealing, but it doesn’t guarantee you’ll save money in the long run.
Federal Tax
While most people won’t have to worry about state taxes, the same can’t be said about federal taxes on Social Security benefits. The federal government uses “provisional income” to determine how much of your Social Security is taxable. Provisional income includes half of your Social Security benefits, your AGI, and any non-taxable interest you might have.
The table below explains how much of your benefits may be taxed based on your income and filing status:
| Marital Status | 0% Taxed (if income is below) | 50% Taxed (if income is between) |
|---|---|---|
| Single | $25,000 | $25,000 – $34,000 |
| Married | $32,000 | $32,000 – $44,000 |
While up to 50% or even 85% of your benefits could be taxable, this doesn’t mean you’ll lose half of your benefits. Instead, you’ll pay ordinary income tax on that portion, just like you would for any other taxable income.
How to Minimize
Want to avoid federal taxes on Social Security? It might be possible by carefully managing your income. One option is to rely more on Roth savings, if you have them. Since Roth contributions are taxed upfront, withdrawals in retirement are tax-free, meaning they won’t increase your taxable income.
If Roth savings aren’t available to you, another option is planning ahead for taxes. You can choose to pay all your taxes at once during tax season, or you can ask the government to withhold a portion of your Social Security checks for taxes. This can help spread out the cost over time and avoid a hefty bill later.
Smart Retirement Decisions
Ultimately, the decision of where to retire isn’t just about state taxes. It’s about balancing multiple financial considerations, including federal taxes, the cost of living, and personal preferences like being close to family or enjoying the weather. By taking a holistic approach to your retirement planning, you can ensure that your Social Security benefits will provide the support you need throughout your golden years.
FAQs
Do all states tax Social Security benefits?
No, only 10 states tax Social Security benefits.
What determines if I pay Social Security taxes?
Your adjusted gross income and the state’s tax rules determine this.
How much of my Social Security is taxed by the federal government?
Up to 50% or 85% could be taxed, depending on your income.
Can I avoid paying federal taxes on Social Security?
Yes, by reducing your taxable income or using Roth savings.
Should I move to avoid state taxes on Social Security?
It depends. Consider overall living costs, not just state taxes.
