A recent analysis by the AARP found a detail that may worry many who are looking forward to the years in which they will be able to enjoy their retirement: 1 in 7 retired Americans depend entirely on Social Security to cover their living costs. But those benefits don’t always come tax-exempt.
That’s why planning when deciding where to live, when it comes to applying for retirement, should also consider which states charge taxes on Social Security benefits, and which do not.
Why Do States Tax Social Security Benefits?
The taxation of Social Security, as established in 1984 following the enactment of Amendments in 1983, is a key aspect of the tax system in the United States. These amendments were signed into law during the presidency of Ronald Reagan. According to this legislation, it was established that up to 50% of Social Security benefits could be considered as part of a taxpayer’s taxable income, as long as their total income exceeded certain thresholds determined by law.
This means that, in practical terms, Social Security benefits can be taxed if a person’s total income reaches or exceeds the limits set by current tax regulations.
This measure was implemented with the aim of guaranteeing greater fairness in taxation and ensuring that those taxpayers with higher incomes also contribute to the Social Security system in a manner proportional to their economic capacity. So far we are talking about taxes from the federal level, but there is worse news for retirees: some states also impose their own state income taxes on retirement benefits, but they are few, fortunately.
Even though, every state has the right to establish their own rules and legislation in this matter, and they might change within years, such as the recent legislation changes in Missouri y Nebraska: both states have decided to stop taxing Social Security benefits in 2024.
How Much Will Taxes Take From Your Retirement Savings?
Here’s an example to illustrate how the taxation of Social Security Benefits works in the United States:
Imagine a retiree receiving $40,000 in Social Security benefits in a year. According to the current tax legislation, the tax on Social Security Benefits is 5%. To calculate how much money it would cost this retiree in taxes, we must first determine the amount of Social Security benefits that would be subject to this tax.
As determined in the law, 50% of the $40,000 (which represents the maximum percentage of benefits that can be taxed) is $20,000. Applying the 5% tax to this $20,000, we get that the retiree would have to pay $1,000 in taxes on his Social Security benefits.
So, in this example, if a retiree receives $40,000 in a year and the tax on Social Security Benefits is 5%, it would cost him $1,000 in taxes on his Social Security benefits.
States That Tax Social Security Retirement, and States That Don’t
The ten states where social security benefits are still taxed are: Colorado, Connecticut, Kansas, Minnesota, Montana, New Mexico, Rhode Island, Utah, Vermont and West Virginia. In each of those states, there are particular and general provisions unique to each of them, and that includes deductions for people below certain thresholds or ages.
Most states (besides Washington DC) will not tax your Social Security income in 2024. These states are as follows:
- 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
- Washington, D.C.
- Wyoming
