Social Security plays a major role in the financial lives of millions of Americans. For some, it’s virtually all of their retirement income, for others, it’s a significant portion of their retirement income, and for still others, it’s more of a nice-to-have perk. Regardless of what role Social Security will play in your retirement planning, it’s important to understand the tax implications of your benefits so you can plan accordingly.
The only difficulty with Social Security benefits is that retirees in 10 states have to pay taxes on their benefits at the state level. The better news, however, is that there are then 40 states where retirees not do not have to worry about such taxes.
Retirees in the following states do not have to worry about state Social Security taxes
Here are the 40 states (along with the District of Columbia) that do not impose taxes on Social Security benefits:
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Alabama
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Alaska
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Arizona
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Arkansas
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California
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Delaware
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Florida
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Georgia
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Hawaii
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Idaho
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Illinois
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Indiana
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Iowa
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Kentucky
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Louisiana
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Maine
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Maryland
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Massachusetts
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Michigan
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Mississippi
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Missouri
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Nebraska
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Nevada
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New Hampshire
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New Jersey
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new York
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North Carolina
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North Dakota
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Ohio
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Oklahoma
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Oregon
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Pennsylvania
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South Carolina
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South Dakota
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Tennessee
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Texas
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Virginia
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Washington
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Wisconsin
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Wyoming
An encouraging sign for those living in one of the 10 states that still tax Social Security benefits is that states have slowly but surely begun to eliminate the tax. Missouri and Nebraska, for example, taxed Social Security benefits until early 2024, and West Virginia is on track to eliminate its Social Security taxes entirely by 2026.
Social Security tax rules can change annually, so it’s important to stay up to date with your state’s rules. Most changes involve states eliminating the tax, but that doesn’t mean there can’t be situations where a state that doesn’t have a tax decides to reinstate the tax. Staying up to date will help you avoid being caught off guard and planning your finances accordingly.
Avoiding state taxes does not mean you can avoid federal taxes
Regardless of your state’s specific rules for taxing Social Security, the federal rules apply to everyone. To determine your tax liability, the IRS uses your “total income,” which includes your adjusted gross income (AGI), any nontaxable interest (such as interest on municipal bonds), and half of your annual Social Security benefits.
For example, if your AGI is $60,000, you receive $24,000 in Social Security benefits annually, and you have $1,000 in tax-free interest, your total income is $73,000. This is how the IRS could tax your benefits based on total income and tax status.
An important note is that the percentages above do not indicate how much of your benefits will be taxed – they indicate how much justified taxable. The taxable portion of your Social Security benefits is added to your other income and then taxed at your regular income tax rate.
As an example, let’s say a single person has a total income of over $34,000, receives $20,000 in Social Security benefits annually, and is in the 22% tax bracket. If 85% of their benefits are taxable ($17,000), $17,000 would be added to their taxable income and taxed at 22%, resulting in a debt of $3,740 for their Social Security benefits.
Remember: Social Security changes are not uncommon. The best thing you can do is make sure you are as informed as possible about the rules that apply to your personal situation. The last thing you want is to be surprised by an unexpected tax bill.
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40 States That Don’t Tax Social Security Benefits was originally published by The Motley Fool