Many seniors are shocked to learn that they don't get to keep all of their Social Security benefits in retirement. That's because those benefits are subject to federal taxes for moderate and high earners. Some lower earners may also have their benefits taxed, depending on their specific income.
But federal taxes on Social Security aren't the only taxes to worry about. Depending on the state you settle down in for retirement, you may be on the hook for additional taxes, too.
There are 13 states that tax Social Security benefits to some degree. The good news, though, is that most states do not impose their own tax on those benefits. So if you want to keep more of that money, you may want to focus on those 37 when deciding where to call home during retirement.
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The 37 states that don't tax Social Security
Regardless of what your total retirement income looks like, you won't pay taxes on your Social Security benefits in these 37 states:
- Alabama
- Alaska
- Arizona
- Arkansas
- California
- Delaware
- Florida
- Georgia
- Hawaii
- Idaho
- Illinois
- Indiana
- Iowa
- Kentucky
- Louisiana
- Maine
- Maryland
- Massachusetts
- Michigan
- Mississippi
- Nevada
- New Hampshire
- New Jersey
- New York
- North Carolina
- Ohio
- Oklahoma
- Oregon
- Pennsylvania
- South Carolina
- South Dakota
- Tennessee
- Texas
- Virginia
- Washington
- Wisconsin
- Wyoming
But does this mean that you should automatically write off the other 13 states for your retirement? Not necessarily.
There are factors you should take into account when deciding where to live during your senior years outside of Social Security taxes. These include:
- Housing costs and property taxes (along with the general cost of living)
- Access to healthcare
- Climate
- Proximity to family and loved ones
- Amenities like parks and recreation
While it's true that having an extra bite taken out of your Social Security benefits may not be ideal, the reality is that you can more than make up for that by retiring someplace with affordable housing and healthcare. As such, it's a good idea to do your research before assuming that you shouldn't move to a state that taxes Social Security.
Another thing to keep in mind is that if you're a low or moderate earner, many of the states that tax Social Security offer exemptions you might qualify for. So again, it pays to get all of the facts before writing off 13 states from the get-go.
Prepare for taxes on Social Security
Ideally, Social Security won't be your only income source during retirement. But if it's a big one, you'll need to gear up for taxes and prepare to lose a chunk of those benefits.
You can compensate, though, by securing other retirement income streams that aren't subject to taxes. Roth IRA and 401(k) withdrawals, for example, get tax-free treatment. And if you invest in municipal bonds for retirement, the interest payments you collect during the year will be exempt from federal taxes, and in some cases, state taxes, too.
It definitely stinks to have to pay taxes on Social Security. But if you prepare accordingly, giving up a piece of those payments may not hurt you too badly.
