Living In One of These States? Prepare for a Lower Social Security Check

Where you retire has a lot of financial implications. Of course, location influences the cost of living; someone retiring in San Francisco will probably need more than someone retiring in a small North Carolina town. But along with the cost of living, where you live can directly affect your Social Security benefits because of the tax implications.

While this doesn't apply to everyone, people living in the following 12 states should prepare to potentially have a lower-than-anticipated monthly Social Security payout.

Image source: Getty Images.

Each state sets its own rules

Most states don't tax Social Security benefits, but there are 12 that could potentially tax at least a portion of your benefits under certain circumstances:

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

Luckily, living in one of those states doesn't guarantee you'll pay taxes on your benefits. Each state sets its own rules about who gets taxed and how much.

For example, in Missouri, single filers making over $85,000 and joint filers making over $100,000 will owe taxes on their Social Security (there won't be any tax starting in 2024). In Colorado, anyone 65 or older can deduct their benefits from their state income in full, but people ages 55 to 64 must pay a 4.4% tax on any retirement income above $20,000.

Make sure you regularly check your state's specific rules, because they can change.

Federal tax rules may still apply

Federal tax rules still apply to Social Security benefits regardless of your state. Instead of standard tax brackets, the government uses provisional income to determine how much you pay. Your provisional income is your adjusted gross income (AGI) plus half of your annual Social Security benefit and all nontaxable interest.

For instance, if someone's AGI is $80,000, and they receive $20,000 annually from Social Security and $4,000 from municipal bond interest, their provisional income would be $92,000.

Data source: Social Security Administration.

An important note is that those percentages aren't the amount your Social Security benefits will be taxed. It's the amount that's eligible to be taxed. A single filer making $30,000 wouldn't have 50% of their benefits taxed, but 50% would be taxable. The amount you pay in taxes will depend on your regular income tax bracket.

Use a Roth IRA if you're eligible

A Roth IRA is a retirement account that allows you to contribute after-tax money and take tax-free withdrawals in retirement. The only requirements for withdrawals are that you must be at least 59 1/2 years old and have had your account for at least five years.

Roth IRA income in retirement is a good way to lower your tax obligation because it doesn't count toward your taxable income. In this case, having enough Roth IRA income to keep your AGI below $25,000 could be the difference between up to 50% of your Social Security income being eligible for federal taxes and none being eligible.

There's an income limit for Roth IRA eligibility, so it's good to take advantage while you can. In 2023, your income must be under $153,000 for single filers and $228,000 for married people filing jointly.

Get an idea of what your Social Security benefit will be

It's hard to properly plan your retirement income if you're not aware of the role Social Security will play. To help with this, you should check your Social Security earnings record.

Your earnings record includes a record of all your annual earnings (hence the name) as well as your projected Social Security monthly benefit. You can see a projection of your benefits if your claim is early, at your full retirement age, or delayed.

Once you have an idea of what your monthly benefit will be, you can work through how taxes may affect it. This is especially helpful if you're in one of the 12 states that may tax your benefits.