Social Security – States Where You May Lose Part of Your Benefits

Social Security is the bedrock of retirement for most Americans. Without this critical program, nearly 40% of Americans aged 65 and older would fall below the federal poverty line. The impact of retaining all their Social Security benefits versus losing a portion can be immense. Even financially secure retirees rely heavily on Social Security for their income.

Taxation

Unfortunately, residents of nine states may owe state income taxes on a portion of their Social Security benefits. Knowing how Social Security benefits are taxed is crucial for effective financial planning.

Combined Income

Combined income is a specific metric used to determine Social Security taxes. It is calculated as:

• Half of your Social Security income
• Your adjusted gross income
• Any untaxed interest income

Taxable Portion

Based on your combined income, a portion of your Social Security benefits may be subject to taxation. Here’s how it works:

Individuals

• 0%: Less than $25,000
• Up to 50%: $25,000 to $34,000
• Up to 85%: $34,001 and up

Married Couples Filing Jointly

• 0%: Less than $32,000
• Up to 50%: $32,000 to $44,000
• Up to 85%: $44,001 and up

Thresholds

These thresholds might seem low, and Congress hasn’t adjusted them for inflation in over 30 years. With annual cost-of-living adjustments, more retirees are finding a portion of their Social Security benefits taxable.

Nine States with Taxes

Nine states impose income taxes on Social Security benefits. Understanding your state’s tax laws can help you minimize your tax burden.

Colorado

• Under 65: Taxpayers with more than $20,000 in taxable benefits owe state income taxes.
• 65 or older: Exempt from state taxes on Social Security benefits.
• State tax rate: 4.4%

Connecticut

• AGI above $75,000 for individuals or $100,000 for joint filers may be taxed.
• Only up to 25% of benefits can be taxed.
• State tax rate: 2% to 4.5%

Minnesota

• Deductions: Up to $4,560 for individuals, $5,840 for married couples.
• Deductions phase out at higher income levels.
• State tax rate: 6.8% to 9.85%

Montana

• Social Security income taxed at the federal level is also taxed by the state.
• State tax rate: 4.7% to 5.9%

New Mexico

• AGI above $100,000 for individuals or $150,000 for joint filers will be taxed.
• State tax rate: 4.9% to 5.9%

Rhode Island

• AGI thresholds for 2023: $101,000 for individuals, $126,250 for married couples.
• State tax rate: 4.75% to 5.99%

Utah

• AGI above $45,000 for individuals or $75,000 for joint filers will be taxed.
• Tax credit available below these thresholds.
• State tax rate: 4.65%

Vermont

• AGI above $50,000 for individuals or $65,000 for joint filers will be taxed.
• State tax rate: 3.35% to 8.75%

West Virginia

• 65% of taxable Social Security income is subject to state tax, phasing out by 2026.
• State tax rate: 2.55% to 5.525%

Broader Considerations

While some states tax Social Security benefits, it’s essential to focus on the bigger picture:

• Cost of Living: Significantly impacts your quality of life and financial stability.
• Community Offerings: Amenities, healthcare, recreational activities, and social opportunities matter more than state tax dollars.

Strategies

There are several ways to minimize your tax obligations:

• Plan in Advance: Early planning can help navigate tax liabilities.
• Roth Accounts: Utilize Roth accounts to manage taxable income.
• Manage Investments: Smart management of investments can help avoid unnecessary taxes.

Thorough planning can help you avoid an unexpected tax bill. If you’re a retiree, consider how additional capital gains or withdrawals might impact your tax obligations. Consult a tax professional to guide you through the complexities and ensure you’re making the best decisions for your retirement.

FAQs