As people and families get ready to retire, they should think about a lot of things related to their Social Security payments, like which state they want to live in. You might be drawn to one because of family or friends being there or because the weather is nice.
But there are also financial things to think about, like how tax-friendly the state is and how much it costs to live there. Taxes at the state level are often overlooked when talking about Social Security payments. At the moment, only ten states tax some of their residents’ Social Security payouts. These are the things you should know about them.
The list of states that retirees should avoid to protect their Social Security benefits
Data from the Social Security Administration (SSA) show that a lot of seniors only get money from Social Security. Because of this, if they have to pay more taxes, it could hurt their finances. Because of this, here is a list of the 10 places where your Social Security benefits might be taxed:
- Colorado
- Connecticut
- Kansas
- Minnesota
- Montana
- New Mexico
- Rhode Island
- Utah
- Vermont
- West Virginia
If you live in one of these places, don’t worry. A lot of older people who live here never pay their state’s Social Security taxes. Each state has its own set of rules for figuring out which seniors have to pay these taxes and how much they have to pay.
For example, in Kansas, you only have to pay Social Security taxes if your adjusted gross income (AGI) is more than $75,000 a year. Incomes below that level are not taxed by the state. You may still have to pay federal benefit taxes, though, which we will talk about later.
Also, please keep in mind that moving in retirement doesn’t make sense, even if you think you’ll have to pay taxes on your benefits in one of those places. There are some other things that will affect your cost of living when you retire.
You might decide that the money you save by not having to pay Social Security taxes is more important to you than the cheap housing and health care that the state offers. You have to make this choice.
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Does the federal government tax Social Security benefits?
Most seniors don’t have to worry about state Social Security taxes, no matter where they live. But it’s much harder to avoid federal taxes. The federal government figures out a person’s tax bill by looking at their provisional earnings. It’s the same as half of your yearly Social Security income plus your AGI and any interest you have that isn’t taxed.
The SSA’s table below shows how much of your benefits may be taxed by the federal government. It depends on how you filed your taxes and how much estimated income you have.
| Marital Status | 0% of Social Security benefits Taxed (if provisional income is lower than): | Up to 50% of Social Security benefits Taxed (if provisional income is between): |
| Single | $25,000 | $25,000 and $34,000 |
| Married | $32,000 | $32,000 and $44,000 |
What this sentence really means is that you will pay ordinary income tax on that amount, with most people falling into the lower bracket. It doesn’t mean that you will lose 50% or 85% of your wages.
The government hasn’t changed the rules for taxing Social Security benefits since the 1980s. This means that more seniors are now exposed to these taxes. You might be able to avoid them by cutting back on your costs or, if you have any, using your Roth savings to pay for them.
You pay taxes on your Roth payments right away, so the money you take out in retirement is not counted as taxable income. But this strategy doesn’t work for everyone.
After that, the only thing you can do is get tax money ready. You can wait until tax time to pay all of your taxes, or you can ask the government to take some of your checks now to pay your taxes.