Social Security plays a major role in millions of Americans' financial lives. For some, it's virtually all their retirement income; for others, it's a sizable piece of their retirement income; and for still others, it's more of a nice-to-have benefit. Regardless of the role Social Security will play in your retirement finances, it's crucial to understand the tax implications around your benefits so you can plan accordingly.
The one wrinkle to Social Security benefits is that retirees in 10 states may have their benefits taxed at the state level. The better news, though, is that this leaves 40 states where retirees don't have to worry about such taxes.
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Retirees in the following states don't have to worry about state Social Security taxes
Here are the 40 states (along with the District of Columbia) that don't tax 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
- Wyoming
An encouraging sign for those who live in one of the 10 states that still tax Social Security benefits is that states have slowly but surely begun eliminating the tax. Missouri and Nebraska, for example, taxed Social Security benefits until the start of 2024, and West Virginia is on a path to eliminating its Social Security taxes altogether by 2026.
Social Security tax rules can change by the year, so staying up to date on your respective state's rules is important. Most changes are states eliminating the tax, but that doesn't mean a situation can't happen where a state that doesn't tax decides to add the tax back. Staying current ensures you're not caught off-guard and can't plan your finances accordingly.
Avoiding state taxes doesn't mean you can avoid federal taxes
Regardless of your state's specific rules around taxing Social Security, federal rules apply to everyone. To determine your tax liability, the IRS uses your "combined income," which includes your adjusted gross income (AGI), any nontaxable interest (like municipal bond interest), and half of your yearly Social Security benefits.
For example, if your AGI is $60,000, you receive $24,000 in yearly Social Security benefits, and you have $1,000 in nontaxable interest, your combined income would be $73,000. Here's how the IRS could tax your benefits based on combined income and filing status.
- Single filers
- If your combined income is between $25,000 and $34,000, up to 50% of your benefits may be taxable.
- If your combined income is above $34,000, up to 85% of your benefits may be taxable.
- Married and filing jointly
- If your combined income is between $32,000 and $44,000, up to 50% of your benefits may be taxable.
- If your combined income is above $44,000, up to 85% of your benefits may be taxable.
An important note is that the above percentages aren't how much of your benefits are taxed -- they're how much is eligible to be taxed. The portion of your Social Security benefits that are eligible to be taxed is added to your other income and then taxed at your regular income tax rate.
As an example, imagine a single filer has a combined income above $34,000, receives $20,000 annually in Social Security, and is in the 22% tax bracket. If 85% of their benefits are taxable ($17,000), $17,000 would be added to their taxable income and taxed at 22%, resulting in $3,740 owed on their Social Security benefits.
Remember: Social Security changes are common, and the best thing you can do is make sure you're as informed as possible about the rules relevant to your personal situation. The last thing you want is to be caught off-guard with an unexpected tax bill.
