There's a lot to consider when deciding which state you'd like to retire in. You might be drawn to one because of its warm climate or the presence of family or friends. But you also have to take financial factors into account, like the cost of living and the tax-friendliness of that state.
One factor that often gets overlooked is how the states tax Social Security benefits. Right now, there are just 10 states that tax the Social Security benefits of some of their residents. Here's what you need to know about them.
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These 10 states could tax your Social Security benefits
The following 10 states tax the Social Security benefits of some of their seniors:
- Colorado
- Connecticut
- Kansas
- Minnesota
- Montana
- New Mexico
- Rhode Island
- Utah
- Vermont
- West Virginia
If you live in one of these states, there's no reason to panic. Plenty of seniors live here and never pay a dime in state Social Security benefit taxes. Each state sets its own rules for determining which seniors owe these taxes and how much they pay.
For example, in Kansas, you only pay Social Security benefit taxes if your adjusted gross income (AGI) is $75,000 or more. Those with lower AGIs won't owe any state benefit taxes, though they could still owe federal benefit taxes, which we'll discuss below.
Even if you believe you could face benefit taxes in one of the above states, that doesn't mean you should move away in retirement. Several other factors contribute to your retirement cost of living. If the state has affordable housing and healthcare, you might decide that these savings outweigh the Social Security benefit taxes you'd have to pay. That's up to you to decide.
The federal government taxes Social Security too
Most seniors won't have to worry about state Social Security benefit taxes regardless of where they live, but federal benefit taxes are much harder to avoid. The federal government uses provisional income to determine who owes these taxes. This is defined as your AGI, plus any nontaxable interest you have, and half your annual Social Security benefit.
The following table outlines how much of your benefits could be subject to federal income taxes depending on your provisional income and marital status.
|
Marital Status |
0% of Benefits Are Taxable if Provisional Income Is Under: |
Up to 50% of Benefits Are Taxable if Provisional Income Is Between: |
Up to 85% of Benefits Are Taxable if Provisional Income Exceeds: |
|---|---|---|---|
|
Single |
$25,000 |
$25,000 and $34,000 |
$34,000 |
|
Married |
$32,000 |
$32,000 and $44,000 |
$44,000 |
Data source: Social Security Administration.
To be clear, this doesn't mean you could lose 50% or 85% of your checks. It just means you'd pay ordinary income tax on that amount. Income tax brackets range from 10% to 37%, with most people falling toward the lower end.
The government hasn't changed the Social Security benefit taxation thresholds since it implemented them in the 1980s. With average benefits rising over time, more and more seniors find themselves facing these taxes.
It might be possible to avoid them by reducing your spending or relying upon Roth savings if you have them. You pay taxes on your contributions to Roth accounts upfront, so your retirement withdrawals don't count against your taxable income. But these strategies may not work for everyone.
In that case, all you can do is budget for these taxes. If you prefer, you can request that the government withhold some money from your checks for taxes upfront, or you could wait and pay them all at tax time.
