Amounts you get from Social Security are taxed at the federal level because they are considered income. Some people may be surprised to learn, though, that each state can also choose to tax your Social Security payments.
There are nine states that tax your Social Security payments on top of your federal tax. This is not the case in most states. If you get Social Security payments now, these are the nine states you might want to think twice about moving to if you want to get the most out of your benefits.
Why are Social Security benefits taxed?
The government still counts your Social Security benefits as income even after you start getting them. In other words, you will still have to pay income tax if your benefits go over a certain amount.
About forty percent of people who get Social Security pay income tax. Sometimes this is not just because of Social Security; the person getting it also has other sources of income that mean they have to pay income tax.
The IRS says that you have to meet the following income levels before you have to pay income tax on your Social Security benefits:
- File a federal tax return as an “individual” and your combined income* is
- Between $25,000 and $34,000, you may have to pay income tax on up to 50% of your benefits.
- More than $34,000, up to 85% of your benefits may be taxable.
- File a joint return, and you and your spouse have a combined income* that is
- Between $32,000 and $44,000, you may have to pay income tax on up to 50% of your benefits.
- More than $44,000, up to 85% of your benefits may be taxable.
Which states to watch out for
If you are close to retiring and are thinking about relocating, these states are the ones you should watch out for as in addition to federal income tax, they also charge state income tax on your benefits:
- Colorado
- Connecticut
- Minnesota
- Montana
- New Mexico
- Rhode Island
- Utah
- Vermont
- West Virginia
But if you make less than a certain amount of money, these states do not tax you. If you file as an individual in New Mexico and your total adjusted gross income is more than $100,000, you only have to pay taxes on your benefits.
Also, West Virginia is slowly getting rid of its state income tax on Social Security payments. This means that by 2026, they will no longer tax your benefits.
How to reduce the amount of tax you pay on your benefits
If you want to pay less tax on your Social Security benefits, there are many things you can do. Putting money into a Roth IRA account for retirement is one way to do this.
People put money into Roth IRAs after taxes, and money taken out of them does not count toward their total taxable income. Because of this, your gross taxable income goes down, and so does the tax you have to pay on your benefits.
Taking planned withdrawals from your retirement accounts before you retire is another option. If you carefully consider when and how much to take out of your retirement accounts, you may be able to lower your future tax bills, have more control over your retirement income, and be more financially secure in your later years.
This year, there will likely be big changes to Social Security because lawmakers are still worried about the program’s long-term financial health.
As people talk about how to fund the program in the future, beneficiaries can expect possible changes that could affect everything from who is eligible to how much money they get. This year, new laws will also be put into effect that are expected to change the amount of benefits some beneficiaries get if they also get a public pension.
