Millions of seniors today collect Social Security, and for some of them, it's their main source of income. But many retirees are shocked to learn that Social Security benefits, like other types of income, are subject to taxes. And that alone can constitute a major financial blow.
The good news, however, is that one key decision on your part could help you avoid having your benefits taxed.
Choose your retirement home strategically
Whether you'll pay taxes on Social Security at the federal level will depend on your total income. If those benefits are your sole income source, you'll usually get out of taxes, but if you have multiple income streams, taxes could come into play.
To see if you'll be subject to taxes on your Social Security benefits, you'll need to calculate your provisional income. That's your non-Social Security earnings plus half of your annual benefit payout. Once that total exceeds $25,000 for single tax filers and $32,000 for married ones, taxes on benefits take effect.
But that's not the only factor that will determine whether your benefits are taxed. Some states impose their own tax on Social Security, and if you move to one of them, you could lose even more of your money. On the flip side, if you choose to retire in a state that doesn't tax benefits, you'll get to keep more of your benefits to yourself.
Which states tax Social Security?
The list of states that tax Social Security is shorter than the list of states that don't. Right now, 13 states impose that tax:
- New Mexico
- North Dakota
- Rhode Island
- West Virginia
Next year, however, West Virginia is set to stop taxing benefits for low and moderate earners, so you'll have even more options to choose from if you're set on moving to a state that doesn't impose that tax.
Of course, some of the above states offer other benefits to retirees -- reasonably priced housing, outdoor amenities, and access to healthcare. As such, how different states treat Social Security isn't the only factor to look at when deciding where to call home during retirement. But knowing which states tax benefits could help you narrow down your choices.
Also, many of the above states offer an exemption on Social Security taxes if your income isn't particularly high. If you don't expect to have a lot of retirement income outside of your Social Security paychecks, then you may be able to avoid taxes on those benefits regardless.
Social Security is an important income source for seniors. It's also an income source you've earned via years of hard work and paying taxes on your wages. If you want to avoid losing a portion of your benefits, you may want to move to a state that doesn't impose a tax on them, especially if there are other good reasons to take up residence there.