We give the government a lot of our income over our working lives, some of which comes back to us in the form of Social Security benefits later on. But even that might not be entirely ours to keep. Governments in 13 states tax some seniors' Social Security benefits, forcing them to rely more upon their personal savings to cover their expenses.
Knowing which states these are and how they calculate Social Security benefit taxes can help you make educated decisions about where you want to live in retirement and how much you need to save on your own.
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The 13 states that tax Social Security benefits
The following states have taxes for Social Security benefits:
- Colorado
- Connecticut
- Kansas
- Minnesota
- Missouri
- Montana
- Nebraska
- New Mexico
- North Dakota
- Rhode Island
- Utah
- Vermont
- West Virginia
But just because you live in one of these states doesn't guarantee you'll owe taxes on your benefits. Each state has its own formula that determines what percentage of recipients' benefits are taxable.
For example, Kansas residents only pay taxes on Social Security income if their federal adjusted gross income (AGI) is more than $75,000, regardless of their tax-filing status. Other states impose different limits for different filing statuses. The only way to know for sure whether you'll owe state taxes on your Social Security benefits is to check with your state's Department of Revenue.
It might be possible to avoid state taxes by limiting your spending in retirement. Or if you're not attached to where you live, you could consider moving to a state that doesn't tax benefits. But even then, you might not be able to avoid Social Security benefit taxes completely.
The federal government taxes benefits too
The federal government also taxes Social Security benefits of some seniors based on their provisional income. This is your AGI, plus any nontaxable interest, and half of your annual Social Security benefits.
If provisional income exceeds $25,000 for an individual or $32,000 for a married couple, the government can tax up to 50% of Social Security benefits. If provisional income exceeds $34,000 for an individual or $44,000 for a married couple, the government can tax up to 85% of benefits.
But just because you could owe taxes on that much doesn't mean you actually will. The formula that determines how much of your Social Security benefits are actually taxable is beyond the scope of this article, but here's a guide to federal Social Security benefit taxes if you want to learn more.
How to hold onto more of your benefits
Tracking your spending in retirement is key to holding onto as much of your Social Security benefits as possible. Money you withdraw from Roth accounts won't count against you, because those withdrawals are usually tax free. But money taken from tax-deferred retirement accounts will raise your AGI.
It might be possible to keep your provisional income low enough to avoid benefit taxes, but this isn't possible in all situations. If that won't work for you, the best thing to do is estimate how much you could owe and ensure you're saving enough money on your own to cover these taxes.
The rules regarding Social Security benefit taxation could change between now and when you sign up, so it's important to stay aware of any new laws at the state or federal level that could affect how much you owe. Readjust your retirement plan whenever something changes so you don't run into any surprises when you start claiming benefits.
