You may have be aware that Social Security may be subject to taxation, but did you also realize that federal income tax may only be a portion of you have to pay? In addition to this, twelve states impose their own taxes on Social Security income.
This article will examine the IRS’s ability to tax Social Security payments, the different Social Security benefit tax systems in each state, and the significance of understanding how taxes on retirement benefits operate.
Many seniors’ Social Security benefits may be taxed.
If your income exceeds a specific threshold, Social Security checks may be subject to federal taxation. The IRS uses a number known as your “combined income,” which is made up of your taxable income, tax-exempt interest, and half of your Social Security payment, to decide whether your benefits will be taxed.
Your Social Security payment will not be subject to tax if your combined income is less than $25,000 and you are single. On the other hand, if your total income exceeds $25,000, up to 50% of your benefit may be taxed, and if it surpasses $34,000, up to 85% of your SS income may be taxable. The income limits for married couples filing joint returns are $32,000 and $44,000, respectively.
The short version is that you probably won’t have to pay any tax on your benefits if Social Security is your primary source of retirement income. However, there’s a significant probability that your income will be over the taxability level if you get Social Security benefits, pension payments, and/or taxable withdrawals from 401(k) or other retirement accounts. As a result, part of your benefits may be seen as taxable income. Just over half of Social Security recipients will be required to pay taxes on a portion of their retirement payments.
There are separate Social Security taxes in 12 states.
As of 2022, twelve states will tax Social Security payments. The list is as follows, in alphabetical order:
- Colorado
- Connecticut
- Kansas
- Minnesota
- Missouri
- Montana
- Nebraska
- New Mexico
- Rhode Island
- Utah
- Vermont
- West Virginia
Like the federal tax code, each of these states has its own mechanism for taxing benefits, and not all citizens will ultimately have to pay taxes on their Social Security income. The good news is that these criteria are often far higher than those set by the federal government, beyond which benefits become taxable. For instance, Social Security payments are only subject to taxation in Connecticut and Kansas for citizens who make $75,000 or more.
We won’t go into each state’s Social Security tax code separately here. But before claiming your benefits, it’s definitely a good idea to get acquainted with how Social Security and other retirement income is taxed if you live in one of these states.
The potential impact on your retirement
“It’s not how much you earn; it’s how much you keep,” is a proverb you may have heard. And in retirement, this is particularly true. Generating adequate income from all sources (retirement funds, pensions, Social Security, etc.) so that your living expenditures are comfortably met is the overall objective for a financially secure retirement.
Because of this, it’s crucial to have a clear understanding of how much money you may anticipate from Social Security. Even if it is often not worthwhile to relocate just because your retirement income is subject to taxation, it is undoubtedly an essential factor to take into account when making retirement planning decisions.
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