It's common for retirees to aim to maximize their income in their golden years, while minimizing their taxes. It's good to do so, because millions of Americans have not saved as much as they'd like or as much as they'll need in retirement -- and Social Security won't deliver enough for most people to live on.
The average Social Security retirement benefit was only $1,835 as of April 2023. Over the course of a year, that's just about $22,000. Yes, you'll receive more if your earnings have been above average, but not that much more. The biggest benefit was recently $4,555 per month -- or less than $55,000 for the year.
Image source: Getty Images.
Thus, many people would do well to take some steps to increase their future Social Security benefits -- while looking into how to minimize the taxation of those benefits. Fortunately, most states don't tax Social Security benefits.
The 38 states that don't tax Social Security benefits
Here are the 38 non-taxing states -- and you can add the District of Columbia to the list as well.
- Alabama
- Alaska
- Arizona
- Arkansas
- California
- Delaware
- 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
The 12 states that tax Social Security benefits
That list falls short of 50 states, though -- because there are 12 states that do tax Social Security benefits -- to some degree. Let's name names:
- Colorado
- Connecticut
- Kansas
- Minnesota
- Missouri
- Montana
- Nebraska
- New Mexico
- Rhode Island
- Utah
- Vermont
- West Virginia
Social Security taxation isn't that big a deal in many states
If you live in one of those 12 states, don't rush to pack your bags and relocate just yet -- because in many cases, they tax with a light touch.
For example, inColorado, those 65 or older get to deduct all of their Social Security benefits from their taxable income. It's only those younger than 65 who face taxation -- and only after they've deducted up to $20,000 of their retirement income, including Social Security, from their taxable income.
And in Kansas, those with adjusted gross income (AGI) of $75,000 or less face no taxation at all on their Social Security benefits.
Each state has its own rules and tax rates, and they can change over time. For instance, Nebraska recently passed new tax laws that will phase out state taxation of Social Security in coming years. Missouri is considering similar legislation.
So be sure to look up the current details for your own state -- or any state you're considering moving to. The folks at AARP offer details for each state. (Note that when there is taxation, the tax rate may be close to zero, close to 9%, or somewhere in between.)
Focus on the big picture
Whenever you examine the taxation of Social Security benefits in a state, be sure to consider the big picture. Each state has to generate revenue from somewhere to keep its government running. If there's no tax on Social Security income or other income, there may be a significant tax on property and/or on purchases, by way of a sales tax.
You need to look at all the taxes you'll face and see how that total compares to other states' totals. Each of us will have a different situation. If you own no real estate, you can ignore the property tax rates. If you aren't a big consumer, sales tax might not matter much to you -- or it might, if you love to go shopping frequently.
Don't forget Uncle Sam
Meanwhile, remember that while your state might not tax your Social Security benefits, the federal government might do so. Up to 85% of your benefits may be taxed federally. (That doesn't mean you'll face an 85% tax rate -- just that up to 85% of your benefits may be taxed at your income tax rate, which might be, say, 12% or 22%.) The following table shows the taxation thresholds:
Filing As | Combined Income* | Percentage of Benefits Taxable |
|---|---|---|
Single individual | Between $25,000 and $34,000 | Up to 50% |
Married, filing jointly | Between $32,000 and $44,000 | Up to 50% |
Single individual | More Than $34,000 | Up to 85% |
Married, filing jointly | More Than $44,000 | Up to 85% |
Data source: Social Security Administration.
*Your "combined income" is your AGI plus non-taxable interest, plus half of your Social Security benefits
The more you learn about Social Security, the smarter decisions you can make regarding it. For example, you might want to take some steps to increase your future Social Security benefits.
I've been diving into the intricate world of retirement planning for quite some time now, delving deep into the strategies of maximizing income while minimizing taxes, especially focusing on Social Security benefits. The landscape of retirement savings, the nuances of taxation, and the intricate dance between federal and state levies have been my terrain of expertise.
In the realm of Social Security, I've explored the critical aspects that define a retiree's financial stability. For instance, the average Social Security retirement benefit stood at $1,835 in April 2023, roughly translating to an annual sum of around $22,000. But this figure, as we know, varies based on one's earnings history.
Regarding taxation, the differentiation between states that tax Social Security benefits and those that don't is a crucial element. Among the 12 states that do impose taxes on these benefits, the severity of taxation varies. States like Colorado provide deductions for individuals above 65, while in Kansas, those with adjusted gross incomes (AGI) of $75,000 or less might not face any taxation on their Social Security benefits.
It's imperative to note that each state has its unique set of rules and tax rates, subject to change over time. Take Nebraska, for instance, which recently passed laws to phase out state taxation on Social Security over the coming years, mirroring similar considerations in Missouri.
However, the tax issue isn't limited to state boundaries. Even if a state doesn't tax Social Security benefits, the federal government might. Up to 85% of these benefits could be taxed federally, based on one's combined income, which is the adjusted gross income (AGI) plus non-taxable interest plus half of Social Security benefits.
One major takeaway is the need to consider the bigger picture. While some states might not tax Social Security, they could impose higher property or sales taxes. Thus, the totality of taxes in a state should be analyzed comprehensively when contemplating a move.
To make informed decisions, understanding the nuances of Social Security is key. Taking proactive steps to enhance future benefits might be prudent, especially when considering the potential tax implications at both state and federal levels.
