Social Security serves as an important source of income for millions of seniors today, with the average recipient collecting roughly $1,500 a month, or a little more than $18,000 a year. The problem? Half of those people don't get to keep their benefits in full, according to a new survey by the Senior Citizens League, and the reason boils down to taxes.

Social Security benefits aren't free from taxation

Not every senior pays taxes on Social Security. If those benefits are your sole source of retirement income, there's a good chance you won't be liable for taxes. But if you have other retirement income -- say, investments, savings, or a rental property -- then there's a good chance you'll lose a chunk of your benefits each year.

Social Security cards

Image source: Getty Images.

To see if you'll be subject to taxes on Social Security, you'll need to calculate what's known as your provisional income, which is your non-Social Security income plus 50% of your annual benefit. You may be taxed on up to 50% of your benefits if your provisional income lands between:

  • $25,000 to $34,000, and you're a single tax filer
  • $32,000 to $44,000, and you're a married couple filing jointly

Furthermore, you may be taxed on up to 85% of your benefits if your provisional income surpasses the $34,000 mark as a single tax filer, or exceeds $44,000 as a married couple filing jointly.

Now as just mentioned, the typical senior only collects around $18,000 a year, so if that's the sum you're living on, you're below the threshold for benefits to be taxed. But many seniors can't live on just $18,000 apiece, or even $36,000 per couple, and so it's not shocking to learn that about half of Social Security recipients pay taxes on their benefits.

Still, there are a couple of things you can do to retain more of your Social Security income. First, save for retirement ahead of time in a Roth IRA so that your withdrawals don't count as taxable income. With a traditional retirement plan, withdrawals during your senior years are taxed and can add to your provisional income, thereby raising your risk of being taxed on your Social Security benefits.

Additionally, look at moving to a state that doesn't tax benefits. Your provisional income dictates whether your benefits will be taxed at the federal level, but each state makes its own decision about taxing benefits, and the following states impose a tax on them to some degree:

  • Colorado
  • Connecticut
  • Kansas
  • Minnesota
  • Missouri
  • Montana
  • Nebraska
  • New Mexico
  • North Dakota
  • Rhode Island
  • Utah
  • Vermont
  • West Virginia

That said, other than Minnesota, North Dakota, Vermont, and West Virginia, all of the above states do offer some type of exemption so that if you're a lower or even moderate earner, your benefits may not be taxed at the state level at all. And to be clear, many states that don't tax Social Security benefits are also more expensive to live in, so it doesn't necessarily pay to move someplace with higher home prices and property taxes just to avoid state-level taxes on your Social Security income.

Taxing retirement benefits is one of the ways Social Security collects revenue so it can stay afloat. But often, those taxes are a burden for seniors who may have enough income to be subject to them, but who are also far from well-off. You may be able to take some steps to avoid getting taxed on your benefits, but for many seniors, those taxes are just plain unavoidable.