Many seniors struggle to pick the right state to live in for retirement. That's because there are pros and cons to living in different parts of the country. What you might gain in the form of a more moderate climate in one state, for example, you might lose to higher housing costs.
But when you sit down to work through that decision, one factor you may want to keep in mind is Social Security. The good news is that the bulk of U.S. states don't tax Social Security benefits, but it'll help to know which ones are on that list.
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Most states won't take a bite out of your benefits
You may end up relying on Social Security as a primary income source in retirement, or at least an important one. And so you may want to do what you can to shield your benefits from taxes.
The good news is that these 37 states do not require residents to pay taxes on their Social Security income:
- 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
It's worth noting that some of these states don't have an income tax at all. And so Social Security just falls under that umbrella.
Meanwhile, these are the 13 states that do tax benefits:
- Colorado
- Connecticut
- Kansas
- Minnesota
- Missouri
- Montana
- Nebraska
- New Mexico
- North Dakota
- Rhode Island
- Utah
- Vermont
- West Virginia
Many of these states, however, offer exemptions for low or, in some cases, moderate earners. And so moving to one of these states doesn't automatically mean losing a chunk of your Social Security income to taxes.
Will the federal government come after your benefits?
While it's easy enough to avoid Social Security taxes at the state level, avoiding them at the federal level is a different story. Whether you'll need to pay taxes on your Social Security benefits or not will depend on your provisional income, which is calculated by taking half of your annual benefit and adding it to your adjusted gross income and certain type of non-taxable income, like interest from municipal bonds.
From there, you'll face taxes on Social Security if your provisional income reaches $25,000 and you're a single tax-filer, or if your provisional income reaches $34,000 as a married couple filing jointly. And while those taxes won't apply to all of your benefits, you could still end up losing a notable amount of money.
That's why you shouldn't be too quick to write off a state that taxes benefits for your retirement, nor should you assume that life will be much easier financially if you move to one of the 37 states that doesn't tax benefits. Instead, what you should really do is ask yourself:
- Where do I have a solid network of family and loved ones for support?
- Where can I stretch my retirement income the furthest?
- Where can I find the local amenities I'm looking for?
- Where can I go for great healthcare?
You may end up choosing to retire in a state that doesn't happen to tax Social Security benefits, since there are so many of them. But that shouldn't be the primary driver of your decision.
