Saving for retirement is one of the most challenging tasks many of us will ever face, even when we have Social Security to help. These benefits can be worth thousands of dollars per month for some people -- assuming you get to keep it all. But that's not the case for everyone.
If you live in one of the 13 states that take a cut of Social Security checks, you could owe taxes on up to 85% of your annual benefits. But it might be possible to avoid this in some cases. Here's what you need to know.
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These 37 states don't tax Social Security benefits
If you live in one of the following 37 states, you don't have to worry about your state government taking a slice of your Social Security checks:
- Alabama
- Alaska
- Arizona
- Arkansas
- California
- Delaware
- Florida
- Georgia
- Hawaii
- Idaho
- Illinois
- Indiana
- Iowa
- Kentucky
- Louisiana
- Maine
- Maryland
- Massachusetts
- Michigan
- Mississippi
- Nevada
- New Hampshire
- New Jersey
- New York
- North Carolina
- Ohio
- Oklahoma
- Oregon
- Pennsylvania
- South Carolina
- South Dakota
- Tennessee
- Texas
- Virginia
- Washington
- Wisconsin
- Wyoming
But living in one of these states isn't a guarantee that you'll avoid benefit taxes entirely. The federal government also taxes Social Security benefits for some recipients, depending on their tax filing status and provisional income. This is your adjusted gross income (AGI), plus any nontaxable interest and half of your annual Social Security benefit.
If your provisional income exceeds $25,000 for a single adult or $32,000 for a married couple, you could owe taxes on up to 50% of your Social Security benefit. And if your provisional income is greater than $34,000 for a single adult or $44,000 for a married couple, you could owe taxes on up to 85% of your benefits.
But just because you could owe that much doesn't mean you will. Here's a guide to learning more about how the federal government calculates Social Security benefit taxes.
These 13 states do tax Social Security benefits
If you live in one of the 13 states listed below, you could owe state taxes on some of your Social Security benefits:
- Colorado
- Connecticut
- Kansas
- Minnesota
- Missouri
- Montana
- Nebraska
- New Mexico
- North Dakota
- Rhode Island
- Utah
- Vermont
- West Virginia
But you might not owe anything. Each state has its own rules that determine who must pay benefit taxes and how much of their checks are taxable. For example, in Kansas, you only pay taxes on your benefits if your AGI is over $75,000, regardless of filing status. Other states have similar rules.
If you live in one of the states above or plan to retire in one of them, check with the state Department of Taxation to learn more about its rules regarding Social Security benefit taxes.
Can you avoid paying taxes on your Social Security benefits?
It's possible in some cases to avoid state and federal Social Security benefit taxes by planning your retirement withdrawals carefully. If you find yourself nearing the income threshold for benefit taxation, you can either stop taking money out of your retirement accounts for the rest of the year or only withdraw money from Roth savings. Roth withdrawals don't count toward your taxable income because you paid taxes on your contributions when you made them.
But sometimes, avoiding benefit taxes just isn't possible. If you know you're going to owe something, the next-best thing to do is plan for it. Anticipate how much you might owe, and make sure you set that money aside in your budget each year. Pay attention to any changes the government makes to Social Security as well, as this could affect what you owe in taxes.
