These 13 States Could Take a Bite Out of Your Social Security Benefits

Even if you kick off retirement with a decent amount of savings, there’s a good chance you’ll rely heavily on the income you receive from Social Security. And if your nest egg isn’t particularly robust, you can bet on needing those benefits to pay the bulk of your bills.

Unfortunately, the income you collect from Social Security may not be yours to keep entirely. That’s because moderate earners commonly lose a chunk of their benefits to federal taxes.

On top of that, some states impose their own taxes on Social Security. And it’s important to know which ones go that route.

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The 13 states that tax Social Security

Here are the 13 states where you may lose some of your Social Security income to taxes:

Colorado
Connecticut
Kansas
Minnesota
Missouri
Montana
Nebraska
New Mexico
North Dakota
Rhode Island
Utah
Vermont
West Virginia

Most of these states do offer an exemption for lower (and in some cases, moderate) earners, so retiring in one of these places doesn’t guarantee that your benefits will be taxed. But if you’re anticipating a pretty generous retirement income, you should expect to pay state taxes on Social Security if you settle down in one of these states.

That said, just because these 13 states tax Social Security income doesn’t mean you should write them off for your retirement. Some of these states offer an affordable cost of living, so while you may lose a little money to taxes on your benefits, that loss could easily be offset by cheaper housing, transportation, and healthcare.

Avoiding federal taxes on Social Security

As mentioned earlier, regardless of the state you move to in retirement, you could face taxes on your benefits at the federal level. Whether that happens or not will depend on your provisional income.

Provisional income is essentially your non-Social Security income plus half of your annual Social Security income. If you’re single and that figure reaches $25,000, taxes on benefits will start to apply. If you’re married, a provisional income of $34,000 or more will result in some of your benefits being taxed.

If these income thresholds seem very low, it’s because they are — and also, it’s because they haven’t been updated in years. But there’s one step you can take to avoid paying federal taxes on your Social Security income, and it’s to house your retirement savings in a Roth IRA.

Unlike traditional IRAs, Roth IRAs don’t offer an immediate tax break on contributions. But Roth IRA withdrawals are taken tax-free, and they also don’t count when calculating provisional income. As such, if you’re single and take $40,000 in Roth IRA withdrawals every year during retirement, that $40,000 won’t work against you. And so if your remaining retirement income comes in the form of $20,000 in annual Social Security benefits, you won’t face federal taxes on your benefits at all.

Now you may, in that scenario, face state taxes on your benefits, depending on where you live. But those taxes may be manageable, especially if you’ve taken other steps to lower your IRS burden as a senior. And so while it’s important to know which states tax Social Security, you also don’t necessarily need to avoid the states where taxes on benefits apply. This especially holds true if those states offer perks like proximity to friends and family, which it’s hard to put a price tag on.

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