There are multiple factors to consider when you are planning your retirement: proximity of friends and families, the weather, amenities, the cost of living, etc. Retirement is expensive and saving for it is a priority. Moving to a state that is tax-friendly for retirees is one way to save your money.
After retirement, Social Security Retirement Benefits make up about 40% of a median wage earner's income. If you are depending on it to pay your monthly bills, you don't want the state government to get a portion of your benefits.
Now, if you are wondering if you can keep more of your hard-earned Social Security Retirement Benefits based on the state you live in the United States, the answer is yes.
There are 37 states, plus the District of Columbia where you don't have to pay tax on Social Security.
The 37 states are 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, Ohio, Oklahoma, Oregon, Pennsylvania, South Carolina, South Dakota, Tennessee, Texas, Virginia, Washington, Wisconsin, Wyoming. The list includes the 9 states with no state income tax.
In 2022, it will be 38 states as West Virginia will no longer tax Social Security benefits.
Who Gets Social Security Benefits?
According to the Social Security Administration (SSA), an average of 65 million Americans per month will receive a Social Security benefit in 2021, which is over 1 trillion dollars in benefits paid.
For older Americans, Social Security is the major source of income. 9 out of 10 people aged 65 and older get Social Security that makes up 33% of their total income.
For half of the elderly married couples, at least 50% of their income comes from it. And 2 in 5 married couples rely on it for 90% or more of their income.
Apart from being a retirement program, Social security also provides life insurance and disability insurance protection.
While 4 out of 5 beneficiaries are older Americans, one-fifth of the beneficiaries are disabled persons and families of retired, disabled or deceased workers.
Do You Have To Pay Federal Tax On Social Security Benefits?
Living in any of the 37 states doesn't mean that you are exempted from paying federal tax on your benefits.
Not everyone has to pay federal tax on their Social Security Benefits. The taxable portion of your benefits will depend on your income and tax filing status.
To determine your federal tax bill, the SSA uses the size of your "combined income" (adjusted gross income plus non-taxable income plus half of your total benefit amount for the year).
Under the federal tax code, you could owe taxes on up to 50% of your benefit if your combined income exceeds $25,000 as a single filer or $32,000 as a married couple. Or you could owe taxes on up to 85% of your benefit if your combined income exceeds $34,000 or $44,000 as a single filer or married filing jointly respectively.
If you come under the 0% taxation range, you don't have to pay any taxes on your benefits.
Regardless of the income level, no person pays taxes on more than 85% of their Social Security.
What If You Live In One Of The 13 States That Tax Social Security?
Here are the 13 states that tax Social Security Benefits: Colorado, Connecticut, Kansas, Minnesota, Missouri, Montana, Nebraska, New Mexico, North Dakota, Rhode Island, Utah, Vermont, and West Virginia.
Each of the 13 states has its own unique approach and provisions on the taxation of the benefits.
For example, New Mexico provides a deduction that lowers the taxability of all retirement income. Colorado allows taxpayers that are age 55 or older to subtract some of their benefits (pension income as well), under the "pension and annuity subtraction."
And in Connecticut, taxpayers with less than $75,000 (single filers) or $100,000 (joint filers) in adjusted gross income (AGI) are exempted from paying Social Security taxes. This also means that if you can keep your AGI lower either by cutting back on your spending or withdrawing money from your Roth savings (tax-free), you can avoid paying taxes on your benefits.
Do check with your state revenue department to know more about how your state handles Social Security taxes. It can help in avoiding taxes in certain cases.
Also, keep in mind that states that exempt tax on benefits might take a bigger check from other types of retirement income. Maryland does not tax social security but distributions from individual retirement accounts are taxed entirely.
Where To Live In Retirement?
Avoiding taxes on Social Security benefits or moving to a tax-friendly state to save money in retirement is not a bad plan. While this move could have a significant impact on how much you can afford to spend in your senior years, taxes are not the only factor to consider when deciding your place of retirement.
Maybe you want to choose a place where the weather is pleasant, your friends and family stay close by or the cost of living is reasonable. You will have to think if the tax advantage is more beneficial to you in retirement.
Florida and the southern states are the most popular places to retire in the United States. In addition to tax benefits, factors to consider are the satisfaction of current residents, housing affordability, and health care quality.
As the old saying goes, "Nothing is certain except for death and taxes." Paying taxes on your benefits can ruin your retirement savings if you are dependent on it to make ends meet. The good news is that in 37 states, you don't have to worry about state income tax on Social Security. And certain states such as Connecticut have tax exemptions for earners under a certain threshold. It is crucial that you understand taxes and factor them in when planning for your retirement so that you are better prepared and avoid expensive surprises.