As you approach and enter retirement, you might reasonably wonder whether your Social Security benefits will be taxed by your state. It's smart to consider taxes whenever you're thinking about or planning your financial future.
There's good news, too, on that front: Only 10 states currently tax your benefits, and even there, the news isn't all bad. So read on.
Image source: Getty Images.
The 40 states that don't tax your Social Security benefits
Here are the 40 states (plus the District of Columbia) that won't touch your Social Security benefits:
- Alabama
- Alaska
- Arizona
- Arkansas
- California
- Delaware
- Florida
- Georgia
- Hawaii
- Idaho
- Illinois
- Indiana
- Iowa
- Kentucky
- Louisiana
- Maine
- Maryland
- Massachusetts
- Michigan
- Mississippi
- Missouri
- Nebraska
- Nevada
- New Hampshire
- New Jersey
- New York
- North Carolina
- North Dakota
- Ohio
- Oklahoma
- Oregon
- Pennsylvania
- South Carolina
- South Dakota
- Tennessee
- Texas
- Virginia
- Washington
- Wisconsin
- Washington, D.C.
- Wyoming
The 10 states that do tax Social Security benefits
And here are the 10 states that do tax benefits:
- Colorado
- Connecticut
- Kansas
- Minnesota
- Montana
- New Mexico
- Rhode Island
- Utah
- Vermont
- West Virginia
It's not necessarily bad news if you live in one of the states above -- because each state has its own rules and tax rates, and many states partially or fully exempt older citizens and/or those with relatively low incomes. For example:
- In Colorado, your benefits are free from taxation once you turn 65.
- In Vermont, those with incomes below a certain level will have some or all of their Social Security income exempted from taxation.
- New Mexico has also exempted Social Security income from taxation for all citizens except those with fairly high incomes (six figures or more in most cases).
Don't forget the federal government
As nice as it may be to live in one of the 40 states that don't tax Social Security benefits, you may still face federal taxation of your benefits. Specifically, up to 85% of your benefits may be taxed federally. The table below offers details:
|
Filing As |
Combined Income* |
Percentage of Benefits Taxable |
|---|---|---|
|
Single individual |
Between $25,000 and $34,000 |
Up to 50% |
|
Married, Filing Jointly |
Between $32,000 and $44,000 |
Up to 50% |
|
Single individual |
More than $34,000 |
Up to 85% |
|
Married, Filing Jointly |
More than $44,000 |
Up to 85% |
Source: Social Security Administration.
*Your "combined income" is your adjusted gross income (AGI) plus non-taxable interest plus half of your Social Security benefits
This status quo may change over time, too. Some in Washington have suggested ceasing federal taxation of Social Security.
Consider the big picture
Finally, while it's worth exploring whether your state does or doesn't tax Social Security -- or all your retirement income -- remember to consider the big tax picture. For example, your state might not tax retirement income, but it might have a heavy tax on real estate properties. If your home is a costly one, then you might face hefty taxes. Every state needs income, and they will tax in different ways in order to get it. A heavy income tax might be balanced by no sales tax and no property taxes, and vice versa.
Know, too, that there are ways to increase your Social Security benefits. -- such as by timing when you start collecting Social Security strategically. If you can beef up your benefits, you may end up with more money in your pocket even after paying taxes.
