When considering the best state to live in for retirement, taxes should not be overlooked. The taxation of federally taxed Social Security benefits at the state level can impact your financial situation and overall well-being. Currently, nine states do not have a state income tax, with most states that do tax income exempting Social Security benefits. States like Kansas, Missouri, and Nebraska have recently joined the list of states not taxing Social Security for the 2024 tax year. However, the policies around the taxation of Social Security benefits vary among states, with some offering exemptions and deductions to help offset the tax burden on beneficiaries.
To determine if you owe taxes on your Social Security benefits in your state, it is important to stay informed about the changing rules and regulations, including updated thresholds for 2025. Nine states require retirees to pay income tax on their Social Security benefits, with exemptions and tax rates varying by state law. States only tax the portion of Social Security income that is considered taxable by the federal government.
For example, in Colorado, residents can write off up to $20,000 in Social Security benefits if they turn 55 during the tax year. Connecticut residents may pay an additional 3.0% to 6.99% in state income tax but can avoid state taxes on Social Security benefits if their adjusted gross income falls below certain thresholds. Minnesota has four tax brackets ranging from 5.35% to 9.85% and offers deductions for Social Security benefits based on income thresholds. Montana imposes a 5.9% state tax on all income over $41,000, including Social Security benefits, with a new standard deduction for seniors. New Mexico increased its income threshold for state tax on Social Security benefits, exempting retirees with lower incomes from taxation. Rhode Island exempts Social Security benefits from state tax for retirees at or above the age of full retirement.
It is important to understand the tax implications of Social Security benefits in your state to better plan for your retirement finances and quality of life.
Retirement guidelines set by the Social Security Administration currently require individuals to be at least age 67 and have an adjusted gross income below specific thresholds: $130,250 for married couples filing jointly, $104,200 for single or head of household taxpayers, and $104,225 for married couples filing separately. These thresholds are adjusted annually for inflation.
In Utah, Social Security benefits are taxed at a flat state income tax rate of 4.55% as of 2024. Seniors and retirees in Utah may qualify for either a retirement credit of up to $450 for those born in or before 1952, or a tax deduction for those who received Social Security, disability, or survivor benefits but do not meet the age requirements for the retirement credit. Eligibility for these credits cannot be combined.
Residents of Vermont can expect to pay state income tax ranging from 3.35% to 8.75%, with the exclusion of Social Security benefits dependent on filing status and adjusted gross income. Married couples filing jointly can fully deduct Social Security benefits if their income is below $65,000, with partial exemptions available for income between $60,000 and $75,000. Other senior taxpayers can fully deduct benefits if their income is below $50,000.
West Virginia is phasing out state income tax on Social Security benefits over three years, starting in 2024. The percentage of benefits deductible will increase annually until 100% is allowed in 2026. Previously, only seniors earning up to $50,000 annually (or $100,000 for married couples filing jointly) could deduct these benefits.
Many states do not tax Social Security benefits, with several not levying state income tax at all. Nine states with no state income tax include Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming. Additionally, 32 states and Washington, D.C., that have state income tax allow seniors to exclude Social Security benefits from their state taxes.
The federal government taxes Social Security benefits, with taxation beginning in 1984 and specific rates and income thresholds established in 1993.
When it comes to paying taxes on Social Security benefits at the federal level, the income thresholds and tax rates have remained unchanged for the past three decades. These taxes are calculated based on your filing status and your “combined” income, which includes your adjusted gross income, any non-taxable interest earned, and 50% of your Social Security benefits. By knowing your combined income, you can compare it against the following income thresholds to determine your federal tax liability:
For married couples filing jointly:
– 85% of Social Security benefits are taxed for incomes exceeding $44,000
– 50% of benefits are taxed for incomes between $32,000 and $44,000
– Benefits are exempt from taxes for incomes below $32,000
For all other taxpayers:
– 85% of Social Security benefits are taxed for incomes over $34,000
– 50% of benefits are taxed for incomes between $25,000 and $34,000
– Benefits are exempt from taxes for incomes below $25,000
Here are five tips to reduce your tax burden and lower your tax bill as you plan for retirement:
1. Keep your tax bracket low by minimizing your retirement withdrawals to reduce the tax rate on your income and potentially pay less tax on Social Security benefits.
2. Strategically plan your retirement withdrawals to spread the tax burden over several years and stay in a lower tax bracket, especially when required to take minimum distributions from retirement accounts.
3. Convert pre-tax IRAs to Roth IRAs during low-income or low-tax years to save on taxes in retirement.
4. Diversify your portfolio with tax-free bonds to generate tax-free income.
5. Avoid penalties by working with a tax professional to ensure compliance with tax regulations regarding retirement account withdrawals and required minimum distributions.
For personalized tax advice tailored to your situation, consult with a tax professional experienced in pensions and retirement income to optimize tax strategies based on your benefits, savings, and lifestyle.
Get a capital gains exemption specifically for seniors. Taxpayers over 55 were once granted a one-time $125,000 capital gains exemption for selling their home under the over-55 rule. However, this rule was phased out in 1997. Though there is a general capital gains exemption for selling a main home — up to $250,000 for single filers and $500,000 for joint filers if you meet certain ownership and use criteria — there are currently no age restrictions for this exemption.
Adjusted gross income (AGI) is a crucial figure used by the IRS and state tax authorities to calculate your tax liability, representing your total income from various sources minus deductions you are eligible for. This includes income from employment, alimony, retirement benefits, and more.
For the 2024 tax year, the annual earnings limit is $22,230. If you reach full retirement age in 2024, the maximum you can earn in the months leading up to retirement is $59,520. Use the SSA’s earnings test calculator by inputting your birthdate and salary to understand how your pre-retirement earnings might impact your Social Security benefits.
Residents of Kansas are no longer required to pay income tax on their Social Security benefits beginning in the 2024 tax year, following the passage of a bill in June 2024.
The key distinction between saving and investing lies in the accessibility of your funds and the associated risks. Saving involves keeping money in secure accounts with minimal risk, while investing entails purchasing assets such as stocks, bonds, or mutual funds that offer potential for higher returns. Retirees commonly diversify their investments across various retirement accounts, including 401(k)s, IRAs, and taxable brokerage accounts, as well as low-risk deposit accounts like high-yield savings accounts and certificates of deposit. Each retiree’s investment approach may differ, so it’s essential to consider your individual financial goals.
