There are certain aspects of Social Security that overwhelm seniors. For starters, some recipients are surprised at the low income they receive from Social Security. Others, meanwhile, are often shocked to learn that Social Security benefits can be subject to taxes in many cases.
Whether your benefits are subject to federal taxes depends on what your total retirement income looks like. If Social Security is your only source of retirement income, you generally don’t have to pay taxes.
But federal taxes aren’t the only thing to worry about once you start collecting Social Security. Depending on where you retire, you may also be subject to state taxes on your benefits.
Most states don’t tax Social Security
The good news is that right now there are only 13 states that levy their own taxes on Social Security benefits:
- New Mexico
- North Dakota
- Rhode Island
- West Virginia
This means that in these 37 states those taxes don’t apply:
- New Hampshire
- New Jersey
- New York
- North Carolina
- south carolina
- south dakota
Another thing worth noting is that next year West Virginia will stop taxing benefits for residents who earn less than a set amount.
Should You Retire to a State That Has No Tax Benefits?
Avoiding taxes on your Social Security income can be important to you, especially if you expect these benefits to be your primary income stream. But before you make a point of avoiding those 13 (soon to be 12) states that offer tax breaks, there are other factors worth looking at.
For example, look at the cost of living of each state. You may find that while some states offer tax breaks, they also offer much cheaper housing and lower cost of living. And those factors can work more for your financial benefit when you retire than a lack of taxes.
Another thing to consider is that most states that offer tax breaks offer some type of exemption for lower income earners. This means that if Social Security is your primary or only source of income, your benefits may not actually be taxed after all, even if a state tax exists.
Do your research
Taxes on Social Security benefits are not something that should surprise you. It pays to read how Social Security works to make sure you understand the ins and outs of your benefits.
By the way, it’s easy enough to estimate your monthly benefit well in advance of retirement so that you know what to expect. All you need to do is create an account on the Social Security Administration’s website and access your annual earnings statements, which summarize your annual salary and give you a preview of your future benefits.
Editor’s Note: This article has been corrected to note that the West Virginia exception does not apply to all residents.