Are you a retiree living in one of the 9 states that tax Social Security benefits? If so, you might be in for a surprise when tax season rolls around. But don’t worry, we’ve got you covered. In this article, we’ll break down what you need to know and how to avoid losing some of your hard-earned benefits.
| Taxable Portion of Benefits | Combined Income, Individual | Combined Income, Married Filing Jointly |
|---|---|---|
| 0% | Less than $25,000 | Less than $32,000 |
| Up to 50% | $25,000 to $34,000 | $32,000 to $44,000 |
| Up to 85% | $34,001 and up | $44,001 and up |
Table of Contents
Importance of Social Security
Let’s face it, Social Security is the backbone of most Americans’ retirement plans. Without Social Security, 4 in 10 Americans 65 and older would be living below the federal poverty line. That’s a scary thought! So, it’s essential to understand how Social Security works and how it affects your retirement income.
Which 9 States are Affected by Social Security changes?
Unfortunately, 9 states still impose income taxes on some people’s Social Security benefits. These states are:
Colorado: Taxpayers under 65 with more than $20,000 in taxable benefits will owe state income taxes.
Connecticut: The portion of your Social Security income that’s taxed at the federal level may be subject to state taxes if your adjusted gross income exceeds $75,000 for individuals or $100,000 for joint filers.
Minnesota: Taxpayers can deduct up to $4,560 in Social Security benefits from their taxable incomes.
Montana: Any portion of your Social Security income that’s taxed at the federal level is also subject to state income tax.
New Mexico: Taxpayers with adjusted gross incomes exceeding $100,000 for individuals or $150,000 for married couples filing jointly will owe state taxes on any Social Security income that’s also taxed at the federal level.
Rhode Island: Taxpayers below their full retirement age with adjusted gross incomes above certain thresholds will owe taxes on any portion of Social Security income that’s also taxed at the federal level.
Utah: Taxpayers with adjusted gross incomes exceeding $45,000 for individuals or $75,000 for married couples filing jointly will owe taxes on any Social Security income that’s taxed at the federal level.
Vermont: Taxpayers with adjusted gross incomes above $50,000 for individuals or $65,000 for married couples filing jointly will owe income taxes on at least a portion of any Social Security income included on their federal income tax return.
West Virginia: 65% of any Social Security income included on your federal income tax return is subject to state income tax, but this is being phased out.
How to Avoid Losing Benefits?
Now, you might be thinking, “What can I do to avoid losing some of my benefits?” Well, here are a few tips:
- Careful planning: Consider how additional capital gains or retirement account withdrawals will impact your overall tax bill.
- Consult a professional: If you’re unsure about your specific situation, consult a tax expert to learn if there are ways to reduce your tax bill.
Don’t Make Decisions Based on Taxes Alone
While taxes are important, they shouldn’t be the only factor in deciding where to retire. Consider the cost of living, community amenities, and other essential aspects that impact your retirement lifestyle.
Reduce Your Tax Bill Without Migration
There are many ways to reduce your tax bill in retirement without moving to a different state. Planning ahead, using Roth retirement accounts effectively, and managing your capital gains and losses can help you keep more of your retirement income.
I hope this article has been helpful in understanding how Social Security benefits are taxed in certain states. Remember to plan carefully and consult a professional if needed to avoid losing some of your hard-earned benefits. Happy retirement!
FAQs
Which states tax Social Security benefits?
Colorado, Connecticut, Minnesota, Montana, New Mexico, Rhode Island, Utah, Vermont, and West Virginia tax Social Security benefits.
Why do some states tax Social Security benefits?
States tax Social Security benefits because Congress has not updated the thresholds for taxing benefits in over 30 years, and some states choose to tax benefits as part of their income tax.
How can I avoid losing some of my Social Security benefits to taxes?
Careful planning, consulting a tax professional, and considering strategies like Roth retirement accounts and capital gains management can help reduce your tax bill.
So what happens to the people that are disabled? They have no avenue as to help anymore?