9 States to Start Taxing Social Security Benefits in January – What You Need to Know

Social Security benefits are a lifeline for many retirees, providing them with the financial stability they need. However, knowing how these benefits are taxed is crucial to maximizing your retirement income. While most people are aware that Social Security payments are taxed by the federal government, some states also levy their own taxes on these benefits. Let’s learn why Social Security is taxed, which states to be careful of, and how you can reduce taxes on these benefits.

Social Security Benefits

The IRS considers your Social Security benefits as part of your income; therefore, those benefits are also subject to federal income tax. Whether you’ll have to pay taxes or not depends on the total income amount, which may include Social Security payments, wages, dividends, and other forms of income.

Federal Tax Ranges

Individual filers:

• Combined income from $25,000 to $34,000: Up to 50% of your benefits are subject to tax.
• Combined income greater than $34,000: Up to 85% of your benefits subject to tax.

Joint filers:

• Combined income from $32,000 to $44,000: Up to 50% of your benefits are subject to tax.
• Combined income greater than $44,000: Up to 85% of your benefits are subject to tax.

To further explain, the IRS defines combined income as your AGI, nontaxable interest, and half of your Social Security benefits.

States

Most states do not tax social security but, nine of them tax Social Security payments as state income. Consider this if planning to move during retirement: these are some of the states to watch out for:

• Colorado
• Connecticut
• Minnesota
• Montana
• New Mexico
• Rhode Island
• Utah
• Vermont
• West Virginia

Key points

Income limits: Some of these states do not tax Social Security benefits if your income is below a certain limit. New Mexico only taxes individual filers if the adjusted gross income exceeds $100,000.

West Virginia Phase-Out: West Virginia is phasing out their Social Security tax and will eliminate it entirely by 2026.

Tax reduction tips

• Roth IRA Contributions: Contributions to a Roth IRA are already taxed money, and withdrawals from there are not taxed. Because withdrawals from a Roth IRA don’t count toward your combined income, they can reduce the taxes you owe on your Social Security benefits.
• Plan retirement account withdrawals: You can withdraw money from a retirement account like a traditional IRA or 401(k) before you start receiving Social Security benefits, which reduces future taxable income. By making the withdrawals correctly, you can avoid a higher tax bracket.
• State tax exemptions: If you reside in, or are contemplating moving to a state that taxes Social Security, study their income exemptions. Bringing down your adjusted gross income might qualify you for some or all of these exemptions, cutting your state tax load.

What’s Next?

Social Security is undergoing significant changes due to concerns about its long-term financial stability. This year’s legislative moves could affect:

• Eligibility criteria: Adjustments to age requirements or income limits.
• Benefit calculations: Reforms to ensure program sustainability.
• Pension offsets: There may be rules that could change benefits for individuals who are also receiving a public pension.

Retirees should stay informed about these changes so they know how their benefits may be affected.

Conclusion

Knowing how Social Security benefits are taxed is the key to maximizing retirement income. While federal taxes are unavoidable for many beneficiaries, the impact of state taxes can be minimized with proper planning. By choosing the right state and using measures such as Roth IRA contributions, retirees can keep more of their hard-earned benefits.

FAQ’s