Social Security could end up being a critical income source for you in retirement. This holds true even if you start off your senior years with a healthy nest egg.
Seniors are often surprised to see that a $300,000 or $400,000 nest egg starts to get depleted rather quickly once retirement kicks into gear. The upside of Social Security is that you're guaranteed your monthly benefits for life, whereas there's always the possibility of running out of savings if you're too aggressive with withdrawals or market conditions don't work out in your favor.
But many Social Security recipients are shocked to learn that benefits can be taxable -- and not just at the federal level. There are a number of states that impose their own taxes on Social Security income, and if you're thinking of settling down in one of the states on this list, you'll need to take that into account.
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The 12 states that tax Social Security
It used to be that 13 states imposed their own taxes on Social Security, but that list has, thankfully, been whittled down to 12. The states that now tax Social Security income are:
- Colorado
- Connecticut
- Kansas
- Minnesota
- Missouri
- Montana
- Nebraska
- New Mexico
- Rhode Island
- Utah
- Vermont
- West Virginia
Keep in mind that most of these states offer an exemption on Social Security benefit taxes for low earners. Some even include moderate earners in those provisions. But if you're thinking of retiring in one of these states, read up on its rules for taxing benefits so you know what you're in for.
Should you rule out the 12 states that tax Social Security?
Upon seeing this list, your first inclination may be to decide that you simply won't retire in one of these states so you can hang onto more of your Social Security income. But that's not necessarily the best move.
Some of the above states are very affordable, compared to other parts of the country. Even if you lose a bit of your Social Security income to state taxes, you might still come out ahead financially.
Also, you might have personal reasons for wanting to settle down in one of these states. If you love nature, you may be inclined to spend your retirement in Colorado, where you'll have plenty of access to hiking and outdoor sports. If you want to live someplace remote without spending a ton of money on housing, Montana could be a good choice.
Maybe you have family in Minnesota and don't mind the cold winters. It's important to have a support system nearby during retirement, so it may be worth paying taxes on your Social Security income to get that.
Look at the big picture
Taxes are a source of stress for many seniors, so it's important to know what sort of tax burden you may be setting yourself up for. At the same time, don't write off the idea of retiring in a state that taxes Social Security. You might get out of paying those taxes depending on your income, but even if you can't, that state might have other redeeming qualities that make it a great place to call home during your senior years.
