As of January 1, 2024, Missouri and Nebraska residents rejoiced as their states ceased the taxation of Social Security benefits. However, the celebration doesn’t extend far as only 10 states remain that still grasp a portion of their seniors’ Social Security checks.
For those living in these states, it’s crucial to comprehend how their state governments administer these taxes and the potential financial impact. Here, we delve into the specifics you need to grasp about the situation.
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Remaining States Imposing Taxes on Social Security Benefits
The following 10 states continue to impose taxes on the Social Security benefits of certain retirees:
- Colorado
- Connecticut
- Kansas
- Minnesota
- Montana
- New Mexico
- Rhode Island
- Utah
- Vermont
- West Virginia
It’s essential to note that residents of Missouri and Nebraska may still owe Social Security benefit taxes when filing their 2023 returns this year. Nevertheless, this concern will not loom in the future.
Individuals living in these states may not necessarily owe these benefit taxes. Each state has its unique computation to determine who should pay them. For instance, New Mexico only levies taxes on the benefits of single adults earning $100,000 or more per year; married couples filing jointly, heads of household, and qualifying widow(er)s with incomes of $150,000 or more; and married couples filing separately with incomes of $75,000 or more.
It’s prudent to consult your state’s tax department or a local tax professional for a comprehensive understanding of how your state manages benefit taxation. Should you anticipate owing these taxes, putting away some funds for your tax bill would be advisable.
Federal Taxation of Benefits
The federal government could also claim a share of your Social Security benefits, irrespective of whether you evade state benefit taxes. The IRS taxes seniors in all states if their provisional incomes, which comprise adjusted gross income (AGI), plus any nontaxable interest, and half the annual Social Security benefit, exceed a specified threshold based on their marital status.
|
Marital Status |
0% of Benefits Taxed |
Up to 50% of Benefits Taxable |
Up to 85% of Benefits Taxable |
|---|---|---|---|
|
Single |
Provisional incomes under $25,000 |
Provisional incomes between $25,000 and $34,000 |
Provisional incomes greater than $34,000 |
|
Married |
Provisional incomes under $32,000 |
Provisional incomes between $32,000 and $44,000 |
Provisional incomes greater than $44,000 |
Source: Social Security Administration.
If 50% of your benefits are taxable, this implies that 50% of your benefits are subject to ordinary income tax. The tax rate varies from 10% to 37%, contingent on your income, but generally falls towards the lower end of this range for most people.
Considering Relocation to a Tax-Free State
You may contemplate moving to a state that doesn’t impose taxes on Social Security in retirement, aiming to save on costs. However, it’s important to remember that benefit taxes are just one piece of the puzzle. There are various other taxes to take into account during retirement, encompassing state income tax, sales tax, and property taxes.
These factors could potentially wield a more substantial impact on your retirement finances than Social Security benefit taxes. It’s vital to meticulously weigh all the advantages and disadvantages, both personal and financial, when contemplating a move to a different state during retirement.
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