Although most beneficiaries will find themselves free of state taxes over Social Security, it is important to know the federal rules that apply to everyone, Social Security plays a very important role in the financial life of handfuls of United States citizens, for some, it represents practically all their retirement income; for others, it is a fundamental part of their retirement income; and for others, it is rather a pleasant benefit.
No matter what role Social Security will play in your retirement finances, it’s elementary to understand the tax implications revolving around your benefits so you can plan accordingly.
The only downside to Social Security benefits is that retirees in 10 states can have their benefits taxed at the state level. The best news, however, is that this leaves 40 states where retirees don’t have to worry about those taxes.
Retirees from the following states don’t have to worry about state Social Security taxes
These are the 40 states (along with the District of Columbia) that do not tax Social Security benefits:
- Alabama
- Alaska
- Arizona
- Arkansas
- California
- Delaware
- Florida
- Georgia
- Hawaii
- Idaho
- Illinois
- Indiana
- Iowa
- Kentucky
- Louisiana
- Maine
- Maryland
- Massachusetts
- Michigan
- Mississippi
- Missouri
- Nebraska
- Nevada
- New Hampshire
- New Jersey
- New York
- North Carolina
- North Dakota
- Ohio
- Oklahoma
- Oregon
- Pennsylvania
- South Carolina
- South Dakota
- Tennessee
- Texas
- Virginia
- Washington
- Wisconsin
- Wyoming
10 States that Tax Social Security Money
One 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 phase out the tax.
Missouri and Nebraska, for example, taxed Social Security benefits until early 2024, and West Virginia is in the process of eliminating its Social Security taxes completely by 2026.
The Social Security tax rules can vary every year, so it is important to be updated about the rules of your respective state, most of the changes are states that do the elimination of the tax, but that does not mean that a situation can not happen in which a state that does not tax decides to re-add the tax.
Staying up-to-date ensures that you won’t be caught off guard and won’t be able to plan your finances accordingly.
Avoiding State Taxes Doesn’t Mean You Can Avoid Federal Taxes
Regardless of your state’s specific rules applied to Social Security taxes, the federal rules apply to everyone.
To determine your tax liability, the IRS uses your “combined income” which includes your adjusted gross income (AGI), any untaxed interest (such as interest on municipal bonds) and half of your benefits per year from Social Security.
For example, if your AGI is $60,000, you receive $24,000 in benefits over a year from Social Security, and you have $1,000 in non-taxable interest, your combined income would be $73,000.This is how the IRS might tax your benefits based on combined income and filing status for filing purposes.
- Single filers
- If your combined income is between $25,000 and $34,000, up to 50% of your profits may be taxable.
- If your combined income exceeds $34,000, up to 85% of your profits may be taxable.
- Married and filing a joint return
- If your combined income is between $32,000 and $44,000, up to 50% of your profits may be taxable.
- If your combined income exceeds $44,000, up to 85% of your profits may be taxable.
