Attention Retirees! You Could Lose Part of Your Social Security Check in These 9 States

Social Security is a cornerstone of retirement plans for most Americans. According to the Center on Budget and Policy Priorities, without this program, nearly 4 in 10 retired Americans would live below the federal poverty line. The difference between keeping all your benefits or losing a portion of them can significantly impact these households. Even those who retire with a solid financial foundation often rely on Social Security to balance their budgets.

Taxes

In nine states, residents might have to pay state taxes on a portion of their Social Security benefits this year, depending on their income levels. It’s crucial to understand how these benefits are taxed at the federal level as well. The federal government taxes part of your benefits if your “combined income” exceeds certain thresholds.

Combined Income

Combined income is calculated by adding half of your Social Security benefits, your adjusted gross income, and any nontaxable interest. The thresholds for taxation are relatively low and have not been adjusted for inflation in over 30 years, even though benefits receive cost-of-living adjustments almost every year. This discrepancy means more retirees are paying taxes on some of their Social Security benefits.

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Careful planning can help you avoid a surprise on your tax return in April. Retirees should consider how additional income from capital gains or withdrawals from retirement accounts will affect their overall tax bill.

The 9 States

Most states do not tax Social Security benefits, and the number of those that do has been declining. However, nine states still impose taxes on some individuals’ benefits. If you live in one of these states, it’s essential to investigate your personal situation or consult a professional to see if there are ways to reduce your tax bill.

Colorado

• Taxable Benefits Threshold: $20,000 for taxpayers under 65.
• Tax Rate: 4.4%.
• Exemption: Retirees 65 and older are exempt.

Connecticut

• Taxable Benefits Threshold: $75,000 for individuals, $100,000 for joint filers.
• Taxable Portion: 25% of benefits taxed federally.
• Tax Rate: 2% to 4.5%.

Minnesota

• Deduction: $4,560 for individuals, $5,840 for married couples.
• Phase-Out: Begins at $69,250 for individuals, $88,630 for married couples.
• Tax Rate: 6.8% to 9.85%.

Montana

• Taxable Portion: Any benefits taxed federally.
• Tax Rate: 4.7% to 5.9%.

New Mexico

• Taxable Benefits Threshold: $100,000 for individuals, $150,000 for joint filers.
• Tax Rate: 4.9% to 5.9%.

Rhode Island

• Taxable Benefits Threshold: Adjusted for inflation yearly.
• Tax Rate: 4.75% to 5.99%.

Utah

• Taxable Benefits Threshold: $45,000 for individuals, $75,000 for joint filers.
• Tax Rate: 4.65%.
• Credit: Available for those below the threshold.

Vermont

• Taxable Benefits Threshold: $50,000 for individuals, $65,000 for joint filers.
• Tax Rate: 3.35% to 8.75%.

West Virginia

• Taxable Portion: 65% of benefits federally taxed (phasing out by 2026).
• Tax Rate: 2.55% to 5.525%.

Planning

While retirees in these nine states may face additional taxes, it’s essential to consider the overall picture in retirement. Making retirement decisions based solely on taxes might not be wise, as state tax policies can change drastically over time. Many states have taken steps to reduce or eliminate their Social Security taxes in recent years.

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Tips for Managing Taxes

1. Review Income Sources: Understand how additional income, such as from investments or retirement accounts, affects your tax bracket.
2. Consider Relocation: If state taxes are a significant concern, consider moving to a state without Social Security taxes.
3. Consult a Professional: A financial advisor or tax professional can provide personalized advice based on your situation.
4. Monitor Legislative Changes: Stay informed about potential changes in state tax laws that could affect your benefits.

Taxes on Social Security benefits can significantly impact your retirement income, particularly if you live in one of the nine states that still impose such taxes. By knowing how these taxes work and planning accordingly, you can make informed decisions that help you maximize your retirement income. Stay proactive, consult with professionals, and keep an eye on legislative changes to navigate your financial future successfully.

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