Social Security: 27 States That Won’t Tax Your Benefits

Wondering how to escape state income taxes on your Social Security benefits? You could start by moving to one of these 27 states.

Jul 4, 2014 at 7:14AM

Images

One of the biggest complaints about Social Security is that a portion of one's benefits must be given back to the government by way of income taxes. But while the federal government provides few safe harbors from this circular process, more than two dozen states have decided to exempt Social Security benefits from state income taxation altogether.

Social Security and federal taxes
To be fair, the taxation of Social Security at the federal level gets somewhat of a bad rap. This is because the potential tax liability is limited in both size and scope.

In the first case, you don't pay taxes on your benefits if they're your only source of income. Taxes only kick in if your "combined income" -- which equals your adjusted gross income plus your nontaxable interest plus half of your Social Security benefits -- exceeds certain thresholds.

Additionally, even if your combined income falls within the taxable range, no more than 85% of your benefits will be used to calculate your tax liability. I know this is little consolation, but it nevertheless leaves the remaining 15% of your benefits free and clear.

The net result is that, assuming an individual's combined income exceeds $34,000 ($44,000 for married couples), as much as 85% of it will be taxed as ordinary income.

Social Security and state taxes
The situation on the state level isn't quite as clear-cut. This is because various states treat Social Security benefits differently for the purposes of income taxes.

You can see this in the chart below, which breaks down the number of states that tax Social Security in one of four ways.

G

As you can see, 27 states have elected to completely exempt Social Security payments, according to data from the Tax Foundation. This includes Oregon, California, Idaho, Arizona, Oklahoma, Arkansas, and Louisiana, among others.

Meanwhile, eight states exempt Social Security from income taxes subject to specific factors. For instance, Missouri allows married taxpayers with adjusted gross income of less than $100,000 to deduct all taxable Social Security benefits from income. And nine states have no state income tax altogether.

The remaining six states tax benefits to the same extent they're taxed at the federal level.

Like I intimated above, this is no consolation to someone who relies on Social Security for retirement, but must still remit a portion of it to the government. But it's nevertheless better to know the law than to face an audit from the IRS.

How to get even more income during retirement
Social Security plays a key role in your financial security, but it's not the only way to boost your retirement income. In our brand-new free report, our retirement experts give their insight on a simple strategy to take advantage of a little-known IRS rule that can help ensure a more comfortable retirement for you and your family. Click here to get your copy today.

Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.


Compare Brokers