You can more effectively arrange your retirement savings if you are aware of any tax implications.
It's no secret that where you choose to live in retirement can have a big impact on your retirement expenses. Retirement expenses will probably be higher for someone retiring in Santa Monica, California, compared to Myrtle Beach, South Carolina. The spending portion of retirement is simple, but your retirement income may also be impacted, particularly when it comes to Social Security.
Many people's retirement income is largely derived from Social Security. Regrettably, pensioners in these 12 states should be aware that they might have to return some of their money to the federal government.
What states impose taxes on Social Security benefits?
The good news is that Social Security payouts are completely tax-free in 38 states. The bad news is that under certain conditions, 12 states may potentially tax at least a portion of your Social Security benefits:
- Colorado
- Connecticut
- Kansas
- Minnesota
- Missouri
- Montana
- Nebraska
- New Mexico
- Rhode Island
- Utah
- Vermont
- West Virginia
Although it's possible that these states will tax your Social Security benefits, it's not a given. Whom each state taxes and how much it taxes them are governed by specific laws.
For instance, retirees in Colorado who are 65 or older can deduct all of their Social Security benefits from their state income. Beneficiaries aged 55 to 64, including Social Security recipients, must pay a 4.4% tax on all retirement income above $20,000, though. In contrast, only pensioners in Kansas who have an adjusted gross income (AGI) of over $75,000 are required to pay taxes.
In the example above, a retiree aged 66 with an AGI of $80,000 would have to pay Social Security taxes if they resided in Kansas but not Colorado. On the other hand, a 63-year-old retiree with an AGI of $60,000 might be liable for taxes in Kansas but not in Colorado.
It's crucial to know how your state views Social Security benefits and retirement income in general because of this.
Federal taxes should not be overlooked.
The tax game has many levels. Federal taxes cannot be avoided just because you can avoid state taxes. If their provisional income exceeds criteria based on their tax filing status, retirees from all states must pay federal taxes on their Social Security benefits.
All non-taxable interest and half of your annual Social Security benefits are added to your AGI by the government to determine your provisional income. Depending on your provisional income and filing status, the following portion of your Social Security benefits may be subject to taxation:
POTENTIAL PERCENTAGE OF TAXABLE BENEFITS | FILING SINGLE | MARRIED, FILING JOINTLY |
|---|---|---|
0% | Less than $25,000 | Less than $32,000 |
Up to 50% | $25,000 to $34,000 | $32,000 to $44,000 |
Up to 85% | More than $34,000 | More than $44,000 |
This means that for a single filer with an AGI of $40,000, $34,000 will be taxable rather than 85% ($34,000) of their Social Security payment being taken in taxes. That is a crucial distinction. Depending on your tax bracket, you may owe more or less money in taxes.
A Roth IRA could be beneficial.
An after-tax contribution and tax-free withdrawals during retirement are both possible with a Roth IRA. With a significant tax benefit, it is effectively a brokerage account.
Utilizing a Roth IRA is one strategy to lessen the likelihood that your retirement income will be subject to taxation.
Your Roth IRA withdrawals won't be included in your AGI or total taxable income as long as you're taking them. For instance, having enough income from a Roth IRA to only require $30,000 in AGI rather than $40,000 might be the difference between up to 85% and up to 50% of your benefits being subject to federal taxes.
