Not only are taxes one of the biggest expenses you’ll face in retirement, but figuring out what you will and won’t get taxed on can create a major headache.
Adding to the challenge are the special rules around Social Security taxation. Many near-retirees mistakenly believe Social Security income is taxed just like regular income or withdrawals from a retirement account. In fact, the federal government uses a special formula to determine what portion of your Social Security benefits, if any, you’ll owe taxes on. And 38 states (soon to be 40) won’t tax Social Security at all.
Read on to see how the federal government taxes Social Security income, the 38 states that won’t tax benefits, and how you can reduce your taxes in retirement.
Image source: Getty Images.
How the federal government determines Social Security taxes
The IRS uses a metric called “combined income” to determine what portion of your Social Security income is subject to federal income taxes. Combined income is the sum of your adjusted gross income, non-taxable interest income, and half your Social Security income.
When your combined income exceeds a certain threshold, a portion of your Social Security benefits are added to your taxable income. That portion could be anywhere between 0% and 85%, depending on your situation.
The following table details what portion of your Social Security income the federal government will tax.
| Taxable Portion of Social Security | Single Filer Combined Income | Joint Filer Combined Income |
|---|---|---|
| 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% | Greater than $34,000 | Greater than $44,000 |
Data source: Social Security Administration.
Determining how much of your Social Security benefits are subject to federal income tax can be tricky, especially if you’re considering additional retirement account withdrawals or taking capital gains. A good financial planner will help you come up with an effective tax strategy factoring in the impact of combined income on Social Security taxes.
The 38 states that don’t tax Social Security benefits
While you can’t avoid federal taxes on Social Security if your combined income exceeds the above thresholds, you can avoid state taxes.
12 states tax Social Security in some cases, with each state having different rules for how those taxes are calculated. But 38 states (and the District of Columbia) won’t tax your Social Security income at all under any circumstances.
Here are the 38 states that don’t tax Social Security benefits:
- Alabama
- Alaska
- Arizona
- Arkansas
- California
- Delaware
- District of Columbia
- Florida
- Georgia
- Hawaii
- Idaho
- Illinois
- Indiana
- Iowa
- Kentucky
- Louisiana
- Maine
- Maryland
- Massachusetts
- Michigan
- Mississippi
- 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
Starting next year, Missouri will exempt all taxpayers from Social Security income taxes regardless of total income. Nebraska will join the group in 2025 after passing a law repealing its Social Security tax earlier this year.
How to save on taxes in retirement without moving
You don’t have to move to a new state to save on taxes in retirement. So much of retirement is personal, and the cost of living in some states could easily make up for the increased taxes you’ll pay for living there. More importantly, laws are constantly changing, and you never know when a state might change its policy on Social Security taxation. Indeed, many Social Security recipients don’t pay state income taxes on their benefits even if they live in the 12 states that tax some of their residents.
That said, there are some tried-and-true strategies for reducing taxes in retirement and keeping more of your Social Security benefits. These work in any state and can save you money at the state and federal levels.
The first strategy is straightforward. Save money in a Roth retirement account like a Roth IRA. Roth accounts require investors to pay taxes upfront, but withdrawals don’t count toward taxable income as long as you’re at least 59 1/2. That means they have zero impact on your combined income, which determines what percentage of your benefits get taxed. So, a Roth account could have a double tax advantage in retirement if it keeps your Social Security income tax-free.
If you’re already nearing retirement, though, and you have a lot of money in traditional retirement accounts, you still have options. You can withdraw a significant sum from your retirement accounts in the first few years of retirement before you start collecting Social Security. You can use the money for living expenses or perform a Roth conversion, which moves money from a traditional account to a Roth. While you’ll owe a lot of taxes up front, the long-term tax savings can be worth it.
Lastly, consider the special tax treatment for capital gains. Long-term capital gains (achieved by holding a security for more than one year) can have a tax rate as low as 0%. If you can lock in a 0% tax rate on capital gains before you claim Social Security, you may be able to avoid taxes on your benefits later.
You may want to consult a professional tax planner for your options to reduce your taxes in retirement. But you don’t necessarily have to move to one of the above states to do so.
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12 Comments
States might not but the government sure will.
I live in Florida and they took out 10%. Last year and this year!!! Crooks! The ORS does what it wants. Why are the states not doing anything about it?
The government uses our SS contributions until we are of age to “reap” the benefits. Why should we also pay tax on that amount, again? It was taxed as we earned it, and contributed. And who can actually live on the limited amounts that have a 0% fed tax? No one, especially with Bidenomics. IRS will grab any single dollar + over the amount on your AGI immediately. If it’s a one time scenario, then IRRMA plays in and your SS benefits are reduced for a year, as well as Medicare plans supplemental and drug plan costs increased for one year. Heaven forbid you try to invest in anything that will provide a suitable additional amount.
What will happen now– no one is working jobs that pay into SS, so the coffers will run dry. If there’s a better plan out there, do something quickly, because those citizens who earned it are likely to be short- changed just at the time they need it most.
My understanding is different than this article. Maryland DOES tax SS, and WV does not
Washington D C is not a state !
What is Washington, DC? If it’s not a state and not a territory, how do people born there become American – naturalization?
Indiana also taxes same as feds
Any state that is supported through a sales tax is taxing income any time you make a purchase. You can pull California and Washington state off the list plus any others that are supported or partially supported through a sales tax.
NOT TRUE IN ILLINOIS! The Illinois Department of Revenue does not treat Social Security as taxable income. While not counted as a tax-friendly state, Illinois nevertheless excludes Social Security, and other forms of retirement distributions, from its definition of taxable income. However, Illinois residents may still pay a levy on some or all of their Social Security payments. This tax is not due to the state, but to the federal government, i.e., the IRS. How much is owed, if any, turns on some factors:
If the total annual income is beneath $25,000, there is no tax liability.
If an individual has an income within the range of $25,000 and $34,000, the tax liability covers 50 percent of social security payments received.
Individuals whose income tops $34,000 annually are subject to paying taxes on 85 percent of their yearly benefits.
For married couples who file a joint return, if their combined income is between $32,000 and $44,000, then 50 percent of Social Security disbursement value is subject to taxation.
Joint married filers will pay a tax of 85 percent of the value of their Social Security income if their total income is above $44,000.
So, many social security recipients living in Illinois pay taxes on Social Security benefits, and just not to the state of Illinois. State income taxes are not drawn from this federal entitlement.
**source: https://www.lewis.cpa/blog/does-illinois-tax-social-security
california taxes income with a crazy bracket system. social security is included in the calculation of your AGI, if your AGI exceeds $44940 filing jointly or $34692 filing single, then you’re paying tax. It; ‘s not likely that you will reach that level if SSI is your sole source of income
These federal income thresholds for taxation at the 85% level are beyond ridiculous and outdated. $44k? For a married couple?
States with sales tax hit everyone, usually at the same tax rate. The amount of tax you pay is based on your spending, not your income.