Retirees in these 9 states are at risk of losing some of their Social Security checks

Social Security is an important piece of every American’s retirement budget. About half of households with a person age 65 or older get at least 50 percent of their income from Social Security, and about a quarter get at least 90 percent of their income from the program.

Given the importance of Social Security benefits to so many retirees, it’s important to keep every penny of them if possible. Unfortunately, for those who live in nine states, there’s a chance they’ll see a reduction in those monthly checks. Depending on your income, your state may tax some of your benefits.

Here’s what you need to know.

How to keep more of your Social Security benefits

Before focusing on individual states, everyone who collects Social Security should know how their benefits are taxed by the federal government.

The US government uses a measure called “combined income” to determine what portion, if any, of your Social Security benefits are subject to income tax. Combined income is the sum of half of your Social Security income, adjusted gross income, and any untaxed interest income. If your income exceeds the thresholds detailed below, you will have to pay ordinary income tax on some of your benefits.

Data source: Social Security Administration.

You will notice that those thresholds are extremely low. That’s because Congress hasn’t updated these numbers for inflation since they were first created in the 1980s and 1990s. As such, more and more retirees lose more and more of their benefits to taxes each year. year.

However, you can avoid paying some taxes on your Social Security income with good tax planning. If you can get more retirement savings in Roth accounts, withdrawals from those accounts won’t count toward your combined income.

However, you’ll need to be very careful about your capital gains and traditional retirement account withdrawals, plus any interest earned on your cash holdings. Every penny counts when it comes to keeping your Social Security benefits tax-free.

If that wasn’t enough to worry about, retirees in nine states also have to consider the potential burden of state taxes.

Image source: Getty Images.

9 provides that it taxes Social Security

Many states do not tax Social Security benefits, and the number of states that do is decreasing. For example, Missouri and Nebraska eliminated their Social Security taxes in recent years (effective in 2024), and Kansas eliminated them this year (effective immediately). There are only nine states left that will tax Social Security in 2024.

If you live in one of the following states, be sure to take the time to do additional research to see how state tax law affects your situation. You may find it helpful to consult a professional tax planner to help you reduce your tax bill either this year or in the future. It pays to plan your retirement taxes ahead of time.

Here are the basics for each state.

Colorado: Taxpayers under age 65 with taxable benefits of more than $20,000 on their federal income tax return will owe state income taxes on the amount above that threshold. Retirees age 65 or older are exempt from taxes on Social Security benefits. The state tax rate is 4.4%.

Connecticut: Any Social Security income included on your federal income tax return may be subject to taxes in Connecticut if your adjusted gross income exceeds $75,000 for individuals or $100,000 for joint filers. However, the amount is limited to 25% of the benefits received, regardless of the percentage included on your federal return. The tax rate varies from 2% to 4.5%.

Minnesota: Taxpayers can deduct up to $4,560 as an individual or $5,840 for a married couple filing jointly for Social Security from their taxable income. This amount is reduced for residents with adjusted gross incomes above $78,000 for an individual or $100,000 for a married couple, before the full phase-out at incomes of $118,000 or $140,000, respectively. The tax rate varies from 6.8% to 9.85%.

Montana: Any Social Security income on a federal income tax return is subject to state income tax. The tax rate varies from 4.7% to 5.9%.

New Mexico: Taxpayers with adjusted gross income in excess of $100,000 for individuals or $150,000 for married couples filing jointly will owe taxes on any federally taxed Social Security income as well. The tax rate varies from 4.9% to 5.9%.

Rhode Island: Taxpayers below their full retirement age, as defined by Social Security, with adjusted gross income above a certain threshold will owe taxes on any portion of their Social Security income also included on their federal income tax return. Those thresholds were $101,000 for individuals or $126,250 for married couples filing jointly in 2023, but are adjusted for inflation each year. The tax rate ranges from 4.75% to 5.99%.

Utah: Taxpayers with adjusted gross income exceeding $45,000 for individuals or $75,000 for married couples filing jointly will owe taxes on any Social Security income included on their federal tax return. Those below the threshold qualify for a tax offset credit. The tax rate is 4.65%.

Vermont: Taxpayers with adjusted gross income greater than $50,000 for individuals or $65,000 for married couples filing jointly will owe income tax on at least a portion of any Social Security income included on their federal income tax return. The tax rate varies from 3.35% to 8.75%.

West Virginia: A total of 65% of any Social Security income included on a federal income tax return is subject to state income tax. Social Security taxation will phase out over time: 35% is taxable in 2025 and 0% is taxable starting in 2026. The tax rate ranges from 2.55% to 5.525%.

How to decide which state to retire to

It’s true, retirees in the nine states above face the added challenge of state taxes that could reduce their Social Security retirement benefits. But Social Security taxes are not a good reason to choose which state to live in for retirement.

First, tax laws change all the time. The current trend is that more and more states are eliminating taxes on Social Security income. It is quite possible that all of the above states will eventually get rid of the tax. West Virginia already has legislation in place to phase it out by 2026.

More important considerations include the cost of living and what the community has to offer retirees. If you want to live happily, getting a few extra dollars in tax savings won’t compare to a 15% reduction in the cost of living and a vibrant senior community with social activities. These factors could have a much bigger impact on your quality of life than worrying about your tax bill in April.

That said, if the state you want to live in taxes your Social Security income, there are many different ways to avoid your tax bill without changing where you live. The earlier you plan for potential taxes in retirement, the better you’ll be able to reduce or avoid the burden altogether. As mentioned, a professional planner may be worth the price if you live in any of the states above and are concerned about taxes.