Many Americans depend on Social Security to make ends meet each month. Depending on your total household income, you may be surprised that you owe taxes at the federal level on your Social Security benefits. Your state of residence will determine the taxes you owe on your Social Security benefits at the state level during retirement. If it wasn’t obvious, minimizing taxes on your Social Security benefits is like getting a raise on your retirement paycheck.
When your household makes enough money, the IRS will take its cut of your Social Security benefit via federal income taxes. The tax news is better for Social Security recipients at the state level. At this time, 38 states will not be taxing your Social Security. To state the obvious, that leaves 12 states that will tax your Social Security benefits at some level.
While I’d never recommend that my retirement-planning clients move to another state to reduce taxes on their Social Security benefits, it is something to at least be aware of if you are considering relocating in retirement. That being said, I am a Los Angeles financial planner. While California does have a reputation as a high-tax state, surprisingly, it does not tax your Social Security benefits. Also, the tax system in California is progressive (you pay higher rates as your income grows), leading to lower tax bills for many mid-to-low-income Californians compared to what they would owe in other states with flat taxes.
The States That Don’t Tax Your Social Security Benefits
In alphabetical order, Alabama, Alaska, Arizona, Arkansas, California, Colorado, Florida, Georgia, Hawaii, Idaho, Illinois, Indiana, Iowa, Kentucky, Louisiana, Maine, Maryland, Massachusetts, Michigan, Mississippi, Nevada, New Hampshire, New Jersey, New York, North Carolina, Ohio, Oklahoma, Oregon, Pennsylvania, South Carolina South Dakota, Tennessee, Texas, Virginia, Washington, West Virginia, Wisconsin, Wyoming.
When Are Social Security Benefits Taxed?
An estimated 60% of retirees will not owe federal taxes on their Social Security benefits. Many will also not owe state taxes on their Social Security retirement income. From a tax and retirement standpoint, this is excellent news. However, from an income standpoint, it may not be great for your standard of living. You must have a relatively low income to avoid paying taxes on your Social Security benefits completely.
If your total taxable income hits $25,000 as a single retiree or $32,000 as a married couple, your Social Security benefits will begin to get taxed at the federal level. That’s not exactly an income that will leave you living a jet-set lifestyle in retirement. Just 50% of your Social Security income will face federal taxation at the abovementioned income levels. Once your income reaches $34,001 (single) or $44,001 (married), 85% of your Social Security benefits will face taxation from the IRS.
Planning For A More Secure Retirement In 2024
Regardless of which state you choose to live in, you will need more than the maximum Social Security benefit to live comfortably. If you are still working today, look for ways to invest more into your retirement accounts and ensure your money is growing for your future. Also, look for ways to lower expenses in retirement. You might also consider working a few more years, which will help increase your Social Security benefits and reduce the amount of money you will need to fund your eventual retirement.
Read the full article here