Social Security is a big part of most seniors’ retirement plans, and knowing how much to expect from the program is critical to ensuring your financial security. But figuring that out isn’t as simple as estimating the size of your checks.
Seniors also have to worry about losing some of their benefits in federal taxes, and if you live in one of the 13 states listed below, you may also have to deal with state taxes.
The 13 states that taxing Social Security benefits
Only the following 13 states currently tax Social Security benefits:
- New Mexico
- North Dakota
- Rhode Island
- West Virginia
But living in one of these states does not guarantee that you will owe taxes on your Social Security benefits. Not all seniors pay them. It depends on how much you receive from the program and how much other taxable income you have for the year.
Each state has its own rules for determining which seniors owe taxes on their Social Security benefits. For example, Kansas residents with adjusted gross income (AGI) of $75,000 or less pay no tax on their distributions.
If you live in one of the states listed above, it’s a good idea to contact the Department of Revenue to find out how much, if any, you owe.
Don’t Forget Federal Distribution Taxes
Even if you don’t pay state taxes, there’s still a chance the federal government will tax your Social Security benefits. This depends on your preliminary income, which is your AGI, plus any non-taxable interest and half of your 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 face taxes on up to 50% of their Social Security benefits. Single adults with a provisional income of more than $34,000 and married couples with a provisional income of more than $44,000 may be subject to tax on up to 85% of their benefits.
But again, just because you could pay tax on that much, doesn’t mean you will. There is a complex formula that determines how much you actually pay, but that is beyond the scope of this article. Here’s an introduction to Social Security benefits for those who want to learn more.
Avoiding Social Security Benefits
It is not always possible to avoid paying taxes on your Social Security benefits. But those who are careful about limiting their withdrawals from their retirement accounts may be able to do so. See where you are in your tax bracket throughout the year and use Roth savings if possible to avoid crossing the distribution tax thresholds discussed above.
If you are still working, you may also want to consider deferring Social Security until you retire. Doing so can lower your AGI and help you avoid distribution taxes.
However, if there is no way to pay taxes, the next best way is to prepare for it. Try to estimate what you may owe based on your monthly benefit and average taxable income, and make sure you have enough savings set aside to cover this account. Once you start claiming benefits, review how your estimates compare to your actual tax bill and make the changes you need to keep yourself financially safe in retirement.