As thousands of Americans enter the retirement stages, it is vital to have an understanding of how social security is taxed; this is important for financial planning. However, not all states have the same treatment for social security benefits. 2024 still sees several states taxing social security income; in simple terms, it reduces the total income of the retiree. Learn about which state tax on social benefits and the impact it has on your retirement income.
States That Tax Social Security Benefits
Currently, in 2024, 12 states are taxing social security benefits, and these states include:
1. Colorado
2. Connecticut
3. Kansas
4. Minnesota
5. Missouri
6. Montana
7. Nebraska
8. New Mexico
9. North Dakota
10. Rhode Island
11. Utah
12. Vermont
Keynote: Each of these 12 states has its own set of taxation rules on how they tax social security benefits. In some cases, some states set income thresholds that can determine if your benefits are taxed, while others could offer partial exemptions.
Income thresholds and taxation
Social benefits taxation is mostly dependent on an individual’s total income, which includes factors such as pensions and 401(K) distributions. Furthermore, if an individual’s income surpasses a certain threshold, a portion of their social security benefits will be subject to state tax.
Illustration: In Colorado states, taxpayers that are up to the age of 65 and above could be excluded from up to $24,000 of their social security income; therefore, any amount that is above that threshold could be taxed. This is also a similar case in Minnesota; retirees in this region must include their social security benefits amongst their taxable income if only their adjusted gross income (AGI) exceeds the set threshold.
Some common strategies to minimize tax impact
If you are a resident in one of these states that tax social benefits, there are some strategies you can use to reduce the impact on your income. One strategy is to manage your income retirement carefully enough to stay below that state’s taxable income threshold. For further understanding, you can delay the withdrawals from your retirement accounts like IRAs and the 410(K) or convert traditional IRAs to Roth IRAs, which are not subject to required minimum distributions (RMDs) and provide tax-free income in retirement.
Another common strategy is to simply relocate to states that do not tax retirees on their social security benefits. The states that do not tax social security benefits include Florida, Texas, and Nevada. These states are common destinations for retirees who are aiming to maximize their retirement income.
The federal taxation factor
One key point that retirees should be aware of is federal taxes on social security benefits. However, this solely depends on your income level; up to 85% of your social security benefits may be subject to federal taxation. In other words, retirees who are living in these states can incur a double tax burden, which hurts their disposable income.
Planning for Retirement
Just as your body will start feeling weak and your body cannot keep up with your workload, just know that you are gradually approaching retirement age.
You must plan for this phase of your life; it will be wise to understand the taxation scheme of the state you will retire in. Consulting a financial advisor with tax implementation understanding can be a good investment plan because this might just help you to achieve a comfortable and financially stable retirement.
