With the cost of living ever increasing, you probably aren’t eager to give the government more of your money than it needs to. That’s especially true if you’re retired and living on Social Security benefits and personal savings.
While income taxes are a part of everyone’s life, not all seniors need to worry about paying taxes on their Social Security benefits. Here’s a look at which states expect their seniors to pay and how the federal government fits into it all.
Could you be dealing with taxes on your Social Security benefits?
The following 37 states do not tax their residents’ Social Security benefits:
- New Hampshire
- New Jersey
- New York
- North Carolina
- south carolina
- south dakota
If your state isn’t on this list, there’s a chance you’ll face taxes on your benefits, but that’s not a guarantee. Each state has its own rules that determine which seniors owe taxes, and they are usually based on seniors’ adjusted gross income (AGI) or the amount they receive in benefits throughout the year.
In Kansas, for example, only those with an AGI of $75,000 or more owe taxes on their Social Security benefits. Seniors who manage to keep their AGI below this amount are not required to relinquish any of their benefits to the state.
High-income seniors concerned about benefits may consider moving to one of the 37 tax-exempt states listed above to maintain more of their Social Security checks. Doing this may help you avoid distribution tax, but that doesn’t mean you’re completely off the hook.
Does the Federal Government Tax Social Security Benefits?
The federal government also taxes some seniors’ Social Security benefits. It determines how much you owe by looking at your provisional income. That’s your AGI plus any non-taxable interest and half of your annual Social Security benefits.
Individuals with a provisional income of more than $25,000 and married couples with a provisional income of more than $32,000 may be subject to tax on up to 50% of their distributions. Individuals with provisional incomes over $34,000 and married couples with provisional incomes over $44,000 may be subject to tax on up to 85% of their distributions.
But that’s the worst-case scenario. Some people pay taxes on a smaller amount than this, and some manage to avoid distribution taxes entirely.
However, many seniors do pay some Social Security benefits. If you don’t think you can avoid taxes altogether, it’s best to estimate in your retirement plan how much you might owe in taxes and budget for this.
If you are not yet retired, keep an eye out for any rule changes related to Social Security or benefit taxation and update your retirement plan accordingly. Keeping a close eye on these changes will ensure that you aren’t caught off guard by your tax bills when you retire.
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