There’s a lot you have to weigh when deciding where to live in retirement, including the cost of living, proximity to family, and the weather. But one factor you may not have considered is how state law could affect your Social Security benefits.
For the most part, states leave your Social Security checks alone. But if you live in one of the 12 states listed below, there’s a chance you could lose some of your benefit. Here’s what you need to know.
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These 12 states tax Social Security benefits
The following 12 states tax the Social Security benefits of at least some of their seniors:
Colorado
Connecticut
Kansas
Minnesota
Missouri
Montana
Nebraska
New Mexico
Rhode Island
Utah
Vermont
West Virginia
But don’t panic if you call one of these places home. Not all of their residents owe Social Security benefit taxes. Each state sets its own rules that determine who has to fork over some of their checks. This is usually based on your income or your annual Social Security benefit.
It’s best to check with your state Department of Taxation if you’re concerned about owing these taxes to learn its rules. And it doesn’t hurt to double-check the law each year, just in case the state changes the way it taxes Social Security benefits or decides to eliminate this tax altogether.
The federal government taxes Social Security too
Even if you don’t live in one of the states above, you could still owe federal Social Security benefit taxes. It all depends on your provisional income, which is defined as your adjusted gross income (AGI), plus any nontaxable interest you have, plus half your annual Social Security benefit.
The following table shows how much of your benefit could be subject to taxes depending on your provisional income and your tax filing status:
Tax Filing Status
0% of Benefits Subject to Federal Taxes
Up to 50% of Benefits Subject to Federal Taxes
Up to 85% of Benefits Subject to Federal Taxes
Single
Provisional incomes under $25,000
Provisional incomes between $25,000 and $34,000
Provisional incomes over $34,000
Married, filing jointly
Provisional incomes under $32,000
Provisional incomes between $32,000 and $44,000
Provisional incomes over $44,000
Data source: Social Security Administration.
It’s worth noting that just because you could owe taxes on up to 85% of your benefit doesn’t mean you will. And you definitely won’t lose 85% of your checks to the government. The rates above indicate what percentage of your benefit you’ll have to pay income taxes on. But income tax brackets max out at 37%, and most people pay far less than this.
Avoiding Social Security benefit taxes
It’s not possible for everyone to avoid Social Security benefit taxes, but there are a few things you can try to reduce the likelihood of giving up any of your checks. First, if you believe you’ll owe state taxes on your benefits, you might consider moving to one of the 38 states that doesn’t tax Social Security. This could be an option for you if you live close to a state border or you’re not that attached to where you live.
You may also be able to avoid taxes by relying more upon Roth retirement savings, if you have them, as you near the taxation thresholds listed above. These accounts require you to pay taxes on your contributions when you make them. But in exchange, you get tax-free withdrawals in retirement. Because of this, these funds don’t raise your provisional income.
But if this isn’t an option, you may have to get comfortable paying Social Security benefit taxes. You can pay them in a lump sum, but the federal government also enables you to request that it withhold taxes from your monthly checks so you don’t get a surprise bill at the end of the year. Think about what makes the most sense for you and don’t forget to alter your budget accordingly.
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