For many older Americans, Social Security benefits can make or break retirement. The average retiree collects around $1,657 per month in benefits, according to the Social Security Administration, which can go a long way.
However, depending on where you live, you could potentially lose a good chunk of your benefits to taxes. Even after you retire, you may still owe income taxes on your Social Security checks. If you live in one of these 13 states, your benefits could be at risk.
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How taxes will affect your benefits
Your benefits are subject to both state and federal taxes, and how much you'll owe -- or whether you have to pay taxes on Social Security at all -- will depend on where you live as well as your income.
Your state income taxes will depend on where you live. Fortunately, the majority of states do not tax Social Security, but there are 13 that do. These states include:
| Colorado | Connecticut | Kansas | Minnesota | Missouri |
| Montana | Nebraska | New Mexico | North Dakota | Rhode Island |
| Utah | Vermont | West Virginia |
If you live in one of these states, expect to pay state taxes on your benefits. But even if you live in one of the 37 states that do not tax benefits, you're not off the hook just yet.
Federal taxes could take a bite out of your benefits, too
Your federal taxes are based on a figure called your "combined income." This number is half of your annual Social Security benefit amount plus your adjusted gross income.
Say, for example, you're earning $20,000 per year in benefits and are withdrawing $30,000 per year from your 401(k). In this case, your combined income would be $10,000 plus $30,000, or $40,000 per year. Here's how much of your benefits could be subject to taxes, depending on your combined income:
| Percentage of Your Benefits Subject to Federal Taxes | Combined Income for Individuals | Combined Income for Married Couples Filing Jointly |
|---|---|---|
| 0% | Less than $25,000 per year | Less than $32,000 per year |
| Up to 50% | $25,000 to $34,000 per year | $32,000 to $44,000 per year |
| Up to 85% | More than $34,000 per year | More than $44,000 per year |
Data source: Social Security Administration.
The good news is that, regardless of your income, you won't pay federal taxes on more than 85% of your benefits. The bad news is that the only way to get out of paying federal taxes is if your combined income falls below $25,000 per year (or $32,000 per year if you're married).
How to reduce your taxes in retirement
One strategy to limit your taxes is to contribute to a Roth IRA. Roth IRA withdrawals do not count toward your combined income. This means if the majority of your savings are in this type of account, you can reduce your combined income and potentially get out of paying federal taxes altogether.
For instance, say that you're collecting $20,000 per year from Social Security, but instead of withdrawing $30,000 per year from your 401(k), you take it from a Roth IRA instead. In this scenario, your combined income would be just $10,000 -- and you won't owe federal taxes at all.
If your state has a high income tax rate, it may also be worthwhile to consider relocating in retirement. This option isn't for everyone, though, and be sure to think about all the other costs you could incur by moving to a different state -- like property taxes, sales tax, and general cost of living, for instance.
If you're going to depend on Social Security to make ends meet in retirement, it's wise to make sure you know how taxes could affect your benefits. By accounting for them now, you'll be more prepared heading into your senior years.
