No one likes Social Security benefits being taxed. While a dozen states levy a tax on Social Security benefits, there’s no getting away from federal income taxes. A recent article from Investopedia, “Which States Don’t Tax Social Security Benefits,” explains it all.
If you really want to, it is possible to pay zero Social Security taxes. However, this requires staying below the minimum income threshold.
The twelve states that tax Social Security benefits are:
Colorado, Connecticut, Kansas, Minnesota, Missouri, Montana, Nebraska, New Mexico, Rhode Island, Utah, Vermont and West Virginia.
Of these, only Minnesota and Utah add an additional Social Security tax using the same income thresholds as the federal government.
However, retirees are advised not to base their choice of retirement location just on this annoying tax. More important factors to be considered include your overall cost of living, quality of healthcare services, geographic proximity to family and friends, available recreational activities, crime rates and climate.
Social Security benefits taxes are not news. These benefits have been taxed since 1983. Taxes depend on the household’s combined income, aka Adjusted Gross Income (AGI), nontaxable interest and half of the couple or individual’s Social Security benefits and filing status. Regardless of the result, the IRS won’t subject 85% of the total benefit to taxes.
However, remember that income from other retirement sources may also be subject to federal income taxes. It’s not just Social Security. Pension payments are either fully or partially taxable, based on how much after-tax dollars went into the accounts.
The only way to avoid having Social Security benefits taxed by federal or local taxing authorities is to remain way below the minimum income threshold, or using tax-free Roth account withdrawals, Qualified Longevity Annuity Contracts (QLACs, which are getting new attention due to recent legislation) or living on a shoestring. Most people have to live with some level of taxation on their benefits.
Nine states don’t have a state income tax, which includes Social Security income. If taxes are your key reason on choosing where to live, consider Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming for your retirement location. Remember that if a state doesn’t have the benefit of income taxes, funds have to come from somewhere, or the level of services to be provided on a local and state level may be reduced.
Reference: Investopedia (Jan. 25, 2022) “Which States Don’t Tax Social Security Benefits,”
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