Tens of millions of Americans rely on Social Security income to help them make ends meet in retirement. The last thing most retirees need is for the government to take a chunk of their benefits away in taxes. Yet the federal government in some cases makes Social Security benefits taxable. Moreover, although the vast majority of states are kind enough to exempt Social Security benefits from taxation, there are more than a dozen that add state-level income taxes of their own.
You could owe state income tax on your Social Security benefits in these 13 states
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Out of the 50 states in the U.S., the following 13 states have provisions that impose state income tax on Social Security in certain circumstances:
Yet it's important to understand that just because your state is on this list doesn't automatically mean your benefits will be subject to tax. Although all of these states have provisions that impose state income taxes on some of their Social Security recipients, many of them have other tax laws that can limit how much you'll pay in tax or even help you avoid state taxation entirely.
Retirement income exemptions
Some of these states offer tax exemptions for up to a certain total amount of retirement income. For instance, Colorado lets you exempt up to $24,000 in Social Security benefits and other retirement income from state tax. New Mexico has a similar exemption of up to $8,000.
Utah takes a slightly different approach that results in a similar tax impact. Social Security is taxed, but the state offers a retirement tax credit. However, this credit gets phased out above certain income limits that vary according to filing status, leaving some to pay full tax on their benefits.
Overall income limitations
Other states take the approach that they'll impose Social Security taxes only on those with incomes above certain levels. For example, Connecticut doesn't charge tax on Social Security for single filers who make less than $50,000 in adjusted gross income, or joint filers with income of less than $60,000. Nebraska has similar provisions with slightly lower income limits, while Kansas exempts benefits for those with income of $75,000 or less. Missouri has even higher income limits, and even those above those levels can get partial exemptions from tax for their Social Security benefits. Rhode Island's limits are $80,000 for singles and $100,000 for joint filers.
Using the federal rules
Finally, a handful of states simply use the rules that the federal government uses to determine Social Security taxation. These include Minnesota, Montana, North Dakota, Vermont, and West Virginia.
The federal rules typically impose tax on a portion of Social Security benefits. As a starting point, you have to take your income from non-Social Security sources and then add in one-half of what you get from Social Security. If that total is above $25,000 for singles or $32,000 for joint filers, then up to 50% of your benefits can be subject to tax. A higher maximum of up to 85% can apply for singles making more than $34,000 or joint filers above $44,000 in income.
Be smart about Social Security taxes
There's more to the decision of where to live in your retired years than whether your state will tax your Social Security benefits. Many of the 37 states that don't tax Social Security have other provisions that make it costly to live there, while some of these 13 states have offsetting provisions that make them more attractive.
Nevertheless, it's important to know how Social Security taxes will affect your overall income in retirement. That way, you can feel comfortable with whatever decision you make on where to live in your golden years.
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