WPBN: All Social Security benefits are taxed at the federal level as they are considered a portion of your income. Some people might be shocked to hear that states have the authority to tax your Social Security benefits as well.
Nine states tax your Social Security benefits in addition to your federal taxes, however most states do not. If you already get Social Security benefits, these nine states are worth considering before relocating to if you want to get the most out of your benefits.
Why do taxes apply to Social Security benefits?
The government continues to include this as your income even after recipients begin receiving their Social Security benefits. This implies that even if your benefits exceed a specific threshold, you will still be responsible for paying income tax. Income taxes are paid by about 40% of Social Security recipients.
This is frequently caused by the beneficiary having additional sources of income that still require them to pay income taxes, rather than just Social Security.
According to the IRS, you must meet the following income requirements in order to be subject to income tax on your Social Security benefits:
Declare yourself a “individual” on your federal tax return, and your total income is
- You may be required to pay income tax on up to 50% of your benefits between $25,000 and $34,000.
- Up to 85% of your benefits may be taxable if you make more than $34,000.
When you and your spouse file a joint return, your combined income is
- You may be required to pay income tax on up to 50% of your benefits between $32,000 and $44,000.
- Up to 85% of your benefits over $44,000 can be subject to taxes.
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States to be aware of
These are the states you should be aware of if you are nearing retirement and considering moving because they impose state income tax on your benefits in addition to federal income tax:
- Colorado
- Connecticut
- Minnesota
- Montana
- New Mexico
- Rhode Island
- Utah
- Vermont
- West Virginia
If your income is below a specific threshold, you may be exempt from the state tax in these states. The highest barrier is found in New Mexico, where you must earn more than $100,000 in total adjusted gross income in order to be taxed on your benefits as an individual filer.
Furthermore, West Virginia is in the process of eliminating the state income tax on Social Security benefits, meaning that by 2026, your benefits will not be subject to taxation.
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Ways to lower the taxes you pay on your benefits
You can lower the amount of tax you owe on your Social Security income in a number of ways. Contributions to a Roth IRA account for retirement are one method.
This is due to the fact that withdrawals from a Roth IRA are not included in your overall gross taxable income and contributions are made after taxes.
This lowers your gross taxable income, which in turn lowers the tax you must pay on your benefits.
Making calculated withdrawals from retirement accounts prior to retirement is an additional tactic. You may be able to lower your future tax obligations, keep more control over your retirement income, and increase your financial stability in retirement by carefully deciding when and how much to withdraw from your retirement funds.
Significant changes to Social Security are anticipated this year as a result of continuing legislative activity motivated by worries about the program’s viability and financial stability.
Beneficiaries can anticipate possible modifications that could impact anything from qualifying requirements to benefit computations as a result of talks surrounding the program’s future funding.
Furthermore, this year will see the implementation of new law that is anticipated to alter the benefits that some recipients receive in the event that they also receive payments from a public pension.
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