Social Security is a huge part of most seniors' retirement plans, and knowing how much you can expect from the program is crucial to ensuring your financial security. But figuring that out isn't as simple as estimating the size of your checks.
Seniors also have to worry about losing some of their benefits to federal taxes, and, if you live in one of the 13 states listed below, you could face state taxes as well.
The 13 states that tax Social Security benefits
Only the following 13 states tax Social Security benefits right now:
- New Mexico
- North Dakota
- Rhode Island
- West Virginia
But living in one of these states isn't a guarantee that you'll owe taxes on your Social Security benefits. Not all seniors pay them. It depends on how much you receive from the program and how much other taxable income you have for the year.
Each state has its own rules in place for determining which seniors owe taxes on their Social Security benefits. For example, Kansas residents with adjusted gross incomes (AGIs) of $75,000 or less won't pay any taxes on their benefits.
If you live in one of the states listed above, it's a good idea to check with its Department of Revenue to learn about how much, if anything, you could owe.
Don't forget about federal benefit taxes
Even if you don't face state benefit taxes, there's still a chance that the federal government could tax your Social Security benefits. This depends on your provisional income, which is your AGI, plus any nontaxable interest and half your Social Security benefits.
Individuals with provisional incomes exceeding $25,000 and married couples with provisional incomes exceeding $32,000 could face taxes on up to 50% of their Social Security benefits. Single adults with provisional incomes exceeding $34,000 and married couples with provisional incomes exceeding $44,000 could owe taxes on up to 85% of their benefits.
But again, just because you could owe taxes on that much doesn't actually mean you will. There's a complex formula that dictates how much you'll really pay, but it's beyond the scope of this article. Here's a primer on Social Security benefit taxes for those interested in learning more.
Avoiding Social Security benefit taxes
It isn't always possible to get out of paying taxes on your Social Security benefits. But those who are careful to limit their withdrawals from their retirement accounts might be able to do so. Watch where you're at in your tax bracket throughout the year, and if possible, use Roth savings to help you avoid exceeding the thresholds for benefit taxation discussed above.
If you're still working, you might also consider delaying Social Security until you retire. Doing so might reduce your AGI and help you avoid benefit taxes.
When there's no way around paying taxes, though, the next-best thing to do is prepare for them. Try to estimate what you might owe based on your monthly benefit and average taxable income and make sure you set aside enough savings to cover this bill. Once you start claiming benefits, review how your estimates stack up against your actual tax bill and make whatever changes you need to keep yourself financially secure in retirement.