Social Security provides vital benefits for tens of millions of Americans. But many people are surprised to find out that under certain circumstances, benefits are added to your taxable income for IRS purposes and therefore are subject to federal income tax.
This can happen even for those with relatively low incomes, since all it takes for a portion of Social Security to be taxed is to have combined income -- one-half of your Social Security plus your income from other sources -- of more than $25,000 for single filers or $32,000 for married couples filing jointly.
Adding insult to injury, several states impose Social Security income taxes of their own on top of what the IRS takes. However, two states that until now have been among this group are no longer going to tax benefits come 2024. Below, you'll get the details on what Missouri and Nebraska did to eliminate Social Security taxation.
Missouri
Even before lawmakers in its legislature took further action, Missouri already had a pretty lenient set of laws governing Social Security and state taxes. Under the law that will prevail for the 2023 tax year, single filers with incomes of $85,000 or less weren't subject to any taxes on their benefits. The threshold for joint filers was $100,000.
The Gateway Arch in St. Louis. Image source: Getty Images.
However, even that level of taxation caused consternation among politicians. In July, Gov. Mike Parson, a Republican, signed Senate Bill 190 into law. The provisions of that legislation extended the 100% exemption from state income tax on Social Security benefits to everyone regardless of income levels.
The law is set to take effect for the tax years of 2024 and beyond, which means that residents of Missouri only have to worry about checking for tax liability one more time, when they file their 2023 returns.
Nebraska
Nebraska has been making changes to its Social Security taxation rules for a while now. In May 2021, the state legislature passed Legislative Bill 64, which began a gradual repeal of its tax on Social Security income.
Under the initial terms of the bill, which then-Gov. Pete Ricketts, a Republican, signed into law, the proportion of income subject to tax would steadily decline by 10 percentage points per year before disappearing entirely in 2030.
However, the following year, lawmakers introduced a new proposal to accelerate the process of phasing out taxes on Social Security income. That led to a new bill, Legislative Bill 873, that set the annual decline at 20 percentage points, meaning that the tax would go away for good in 2025 rather than 2030. Ricketts signed that measure into law in April 2022.
Still unsatisfied, the Nebraska legislature once again sought quicker relief, and the result was Legislative Bill 754, which sought to move forward the full exemption by a year to 2024. That measure also won support from lawmakers and the current governor, Jim Pillen, a Republican.
And so, Nebraska residents can finally stop looking so closely at the current status of Social Security taxation in their state come New Year's Day.
When states compete, you win
The best thing for retirees in these two states is that both Missouri and Nebraska already feature costs of living that are below the national average. It's important whenever you're considering where you want to live in retirement to consider all of the costs involved, looking beyond tax laws to think about what you'll want to spend on.
Finding a state where Social Security doesn't get taxed is valuable, but it's only one aspect of making an informed decision about how you'll spend your golden years.
