State Taxation Of Social Security Benefits
Most states don’t tax Social Security benefits. But the ones that do either follow the same federal provisional income rules or have special rules and income thresholds to determine what’s taxable.
These 4 states use the federal PI formula: Minnesota, North Dakota, Vermont, and West Virginia. The taxable portion of Social Security for these states is the same as the federal amount.
Nine states have special rules and income thresholds. Most use the federal modified adjusted gross income formula rather than the federal PI formula for taxing Social Security income.
These states are: Colorado, Connecticut, Kansas, Missouri, Montana, Nebraska, New Mexico, Rhode Island, and Utah.
If you live in a state that counts Social Security benefits as taxable income, you should consult your state tax department for details and a qualified tax advisor.
States That Don’t Tax Income From 401s Iras Or The Tsp
Tax-advantaged retirement savings plans401, IRAs and the Thrift Savings Plan provide the lions share of retirement income for many Americans. The TSP is the retirement savings vehicle for federal employees.
There are only three statesIllinois, Mississippi and Pennsylvaniathat explicitly exclude distributions from 401 plans, IRAs or TSPs from taxation. Nine other states do not tax most or all forms of income.
There are several states that tax only part of the distributions from your retirement accounts. In Louisiana, for example, everyone who files jointly or singly and is age 65 or older may exclude up to $6,000 of their annual retirement income from income taxes.
Some states may exempt a portion of TSP income, such as Arkansas, which does not tax the first $6,000 of retirement benefits from either in- or out-of-state sources.
States That Do Not Tax Pension Income
Pensions, also known as defined benefit plans, are less common today than they were in decades past. Less than 14% of working-age people had a defined benefit or cash balance plan in 2020, according to The U.S. Census Bureau.
If you’re among the lucky few who still have a pension, there are 14 states that do not tax the income you receive from it.
Among the states that tax pension income, several exclude a certain amount of pension income from taxation. In Arizona, for example, up to $2,500 worth of pension income from the state, its political subdivisions or the federal government is sheltered from state income taxes.
Some states impose an age restriction on pension income tax exclusions. In Delaware, for example, you must be at least 60 years of age to qualify for an exclusion of up to $12,500.
Finally, while Alabama and Hawaii don’t tax pension income, they do tax retirement income from 401s and IRAs.
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Understanding Taxes On Your Social Security Benefits
You should already know that your income can be subject to both Federal income tax and state income tax. At the Federal level, single filers will owe no taxes on their Social Security benefits if their AGI is less than $25,000. If you earn between $25,000 and $34,000, then 50% of your Social Security benefits will be taxable. For those who earn more than $34,000, 85% of Social Security benefits will be taxable. Regardless of your income, 15% of your Social Security benefits are never taxable at the Federal level.
In addition to Federal taxes, you might owe state income taxes on your benefits if you reside in one of the 12 states listed in the previous section. Each state has its own tax rates and methods for calculating how much of your benefit will be taxed. These taxes can reduce your overall disposable income.
These 38 States Won’t Touch Your Social Security
If you live in one of these 38 states or the District of Columbia, you won’t have to worry about state Social Security taxes. Nine of these states don’t have state income taxes: Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming . In the other states, Social Security benefits aren’t considered taxable income.
That doesn’t mean, however, you’ll avoid taxes altogether on your Social Security checks. Benefits are still taxable at the federal level if your income exceeds certain thresholds.
For single filers with incomes between $25,000 and $34,000, up to 50% of benefits are taxable. Up to 85% of your benefit is taxable if you’re a single filer whose income is greater than $34,000.
Up to 50% of benefits are taxable for married couples filing a joint return who have a combined income between $32,000 and $44,000. Up to 85% of benefits are taxable for couples whose combined income exceeds $44,000.
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How To Calculate Your Social Security Income Taxes
If your Social Security income is taxable, the amount you pay will depend on your total combined retirement income. However, you will never pay taxes on more than 85% of your Social Security income.
Again, if you file as an individual with a total income thats less than $25,000, you wont have to pay taxes on your Social Security benefits in 2022. For the 2022 tax year , single filers with a combined income of $25,000 to $34,000 must pay income taxes on up to 50% of their Social Security benefits. If your combined income is more than $34,000, you will pay taxes on up to 85% of your Social Security benefits.
For married couples filing jointly, you will pay taxes on up to 50% of your Social Security income if you have a combined income of $32,000 to $44,000. If you have a combined income of more than $44,000, you can expect to pay taxes on up to 85% of your Social Security benefits.
If 50% of your benefits are subject to tax, the exact amount you include in your taxable income will be the lesser of either:
- half of your annual Social Security benefits OR
- half of the difference between your combined income and the IRS base amount
The example above is for someone whos paying taxes on 50% of their Social Security benefits. Things get more complex if youre paying taxes on 85% of your benefits. However, the IRS helps taxpayers by offering software and a worksheet to calculate Social Security tax liability.
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Determining If You Owe Federal And State Income Tax On Disability Benefits In Pennsylvania
While SSDI benefits are taxable, whether you owe taxes depends on whether you file jointly or individually and your provisional income. Provisional income includes half of your SSDI benefits, your adjusted gross income, and any tax-exempt interest you earned over the year.
If your only source of income is SSDI, you will most likely not owe any federal income tax. However, if you are an individual with between $25,000 and $34,000 of provisional income, up to half of your SSDI benefits will be considered taxable income. For individuals with more than $34,000 of provisional income, 85% of their SSDI benefits are taxable.
If you are married, filing jointly, and have a combined income of over $32,000, 50% of your disability benefits are taxable. When the combined income exceeds $44,000, then up to 85% of your SSDI benefits are taxable. It is important to remember that the percentages relate to the amount of taxable income and not your marginal tax rate. Your disability benefits will be taxed at your normal marginal rate. For most people, this falls somewhere between 10% and 28%.
Pennsylvania is one of a small number of states that taxes Social Security disability benefits. The same figures apply when determining your state tax obligation. The experienced Philadelphia Social Security benefits lawyers at Young, Marr, Mallis & Associates are available to answer your questions or concerns regarding your benefits.
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Control Your Taxes Now & Later
The longer you wait to claim Social Security benefits, the better chance you’ll have to boost the overall tax efficiency of your retirement income plan. Here’s how.
Drawing down traditional tax-deferred assets before collecting Social Security can enable you to control both your current and future taxes.
The amount you withdraw from a traditional IRA, for example, lowers your account balance, which may reduce your future required minimum distributions .
Since your RMD is considered ordinary income, having smaller distributions while you’re collecting benefits may reduce the taxes on your benefitsor keep you from paying taxes altogether.
In addition, managing your retirement income in this way can also help you qualify to pay lower Medicare parts B and D premiums, which are income-based.
Do You Pay State Taxes On Social Security Benefits
If you are wondering, are state taxes taken out of Social Security, the answer to this question depends upon the state you live in. 13 states namely, Connecticut, Colorado, Kansas, Minnesota, Montana, Missouri, Nebraska, New Mexico, North Dakota, Rhode Island, Utah, Vermont, and West Virginia levy a state tax on Social Security benefits.
Fortunately, there are also some states with no tax on Social Security. In total there are 38 states that dont tax Social Security. So, if you reside in any of these states, you will enjoy tax-free benefits. However, these states do charge other types of taxes. Given below is a detailed explanation of the same.
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State Local Sales And Use Taxes
State income taxes arent the only taxes that can affect your income in retirement. State sales and local sales and use taxes can also take a bite out of your retirement finances. All states and the District of Columbia impose these taxes except Alaska, Delaware, Montana, New Hampshire and Oregon.
The highest state sales taxes are in California , Indiana, Mississippi, Rhode Island and Tennessee . On the flip side, the lowest state sales taxes are in Colorado , Alabama, Georgia, Hawaii, Louisiana, New York, South Dakota and Wyoming . Local sales and use taxes, meanwhile, are assessed by cities, counties and special taxing jurisdictions. These vary widely all across the country.
Retirement Income Tax Basics
Most retirement income can be subject to federal income taxes. That includes Social Security benefits, pension payments and distributions from IRA and 401 plans. Exceptions include distributions from Roth IRA and Roth 401 plans. Federal income taxes on Roth contributions are paid before the contributions are made. These contributions as well as any investment gains can be withdrawn free of federal income taxes after five years if you have reached age 59 1/2.
The situation is more complex when it comes to how states will tax your income. Many states have no income tax at all, so all retirement income, as well as other income, is state tax-free. Most states specifically exclude Social Security benefits from taxation. Some others also exempt retirement account distributions and pensions. Most have a mix of approaches to taxing retirement income.
Now that you have a good baseline knowledge of how retirement taxes work at the state level, lets dive into the states that wont tax you at all.
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State And Local Property Taxes
State and local property taxes are another important factor to consider. The biggest property tax paid by most retirees is the annual tax paid on the value of their home. However, some states and local jurisdictions offer property tax exemptions, credits and abatements to retirees, such as an exemption from paying the school tax portion of their property taxes.
States That Dont Tax Social Security
As of 2021, 37 states plus the District of Columbia do not tax Social Security benefits. These states include the nine that dont have any income tax at all, which are:
Specifics vary, but all the states in this category have some type of Social Security offset based on how old you are or how much you make. Colorado, for example, allows taxpayers 55 and older to subtract some of their Social Security income, while Kansas provides a total exemption for taxpayers earning less than $75,000, regardless of filing status. In Montana, some Social Security benefits may be taxable so it advises its taxpayers to complete a worksheet to determine the taxation of their Social Security benefits.
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States That Do Not Tax Retirement Income
States vary widely in the way they tax retirement income so location is an important consideration in financially planning for retirement. Some states dont levy income states on any sort of retirement income, while others tax IRA and 401 distributions, pension payouts and even social security payments like ordinary income. Income taxes are just part of the story, however, as some states with low or no income taxes have high property, sales and other taxes. Consider working with a financial advisor when you are planning for retirement to make sure you avoid any unnecessary taxes.
Request For Copies Of Returns
Q. How do I request a copy of a tax return I have filed?
A. In order to give you this information, please provide your social security number, name, your filing status for that year, the amount of refund or balance due, and your address on the return at that time. You may email your request by clicking the personal income tax email address in the contact file, or contact our Public Service Bureau at 577-8200.
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Are You Lucky Enough To Live In One Of These States
Social Security is going to get a pretty big boost in 2023, thanks to a large cost-of-living adjustment designed to help the program keep up with inflation. But just because your checks will get bigger doesn’t mean you’ll get to keep all the extra cash.
If you live in one of the 12 states that tax Social Security benefits, you may have to share some of your checks with the government. But residents in the following 38 states won’t have to worry about this when filing their state tax returns.
Image source: Getty Images.
Each state has its own rules that determine who owes Social Security benefit taxes and how much they’ll pay. You may not owe anything. Many states exempt those with annual incomes or Social Security benefits below certain thresholds.
If you’re concerned about whether you could owe state taxes on your Social Security benefits, reach out to your state Department of Taxation to learn how it handles this.
States That Reduce Social Security Taxation Based On Age Or Income
Retirees from ages 55 to 64 are able to deduct up to $20,000 in retirement income, including Social Security benefits, and those 65 or older can deduct up to $24,000. As of this year, Colorado residents can deduct all federally taxable Social Security benefits.
Retirees whose adjusted gross income is than $75,000 for a single filer and $100,000 for joint filers can deduct most or all of their benefit income, according to Investopedia. For people who make more than these thresholds, they can still deduct 75% of Social Security benefit payments.
In Kansas, if your adjusted gross income is $75,000 or less, you dont have to pay state taxes on your benefits, no matter your filing status.
Although Social Security is taxable in Missouri, many seniors will not have to, specifically those who have an adjusted gross income of less than $85,000 or $100,000 , according to SmartAsset.
For many retirees in Montana, Social Security is taxable. However, taxpayers who make less than $25,000 and $32,000 can deduct all of their Social Security retirement income, according to SmartAsset.
Currently, Social Security benefits are still taxable in Nebraska, though on a sliding scale based on adjusted gross income, according to SmartAsset. However, thanks to recent legislation, the state will phase out the state income tax on benefits by 2025, according to AARP.
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What Can You Do About Social Security Benefit Taxes
It’s not always possible to avoid Social Security benefit taxes. But some people might be able to pull it off by keeping costs down. If you’re able to reduce your annual income so it’s below the thresholds listed above or the threshold for taxation in your state, the government may let you hang on to all of your benefit.
If you have Roth retirement savings, you can use them to help keep your income low. Money you withdraw from Roth accounts doesn’t count toward your taxable income because you already paid taxes on your contributions the year you made them. So if you’re nearing the threshold for benefit taxation, you could draw upon Roth savings for the rest of the year.
But if this isn’t feasible for you, you may just have to accept that you’ll owe taxes on your Social Security benefits. This might not result in a tax bill, though. If you have a refund coming, it could just be a bit smaller. Either way, it’s good to anticipate how these taxes could affect your tax liability so you aren’t surprised.
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States That Dont Tax Estates Or Inheritances
The federal estate tax exemption for individuals who pass away in 2023 is $12.92 million, up from $12.06 million in 2022. The vast majority of Americans wont be paying federal estate taxes.
Some states impose inheritance or estate taxes, which is worth considering when deciding where to live in retirement. The states often have much lower exemption amounts than federal estate taxes. For example, Massachusetts only exempts estates worth less than $1 million.
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Social Security Benefit Taxation By State
Out of all 50 states in the U.S., 39 states and the District of Columbia do not levy a tax on Social Security benefits. Of this number, nine statesAlaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyomingdo not collect state income tax, including on Social Security income.
Out of the nine states that do not levy an income tax, New Hampshire still taxes dividend and interest income.
Below is a list of the 11 states that do levy a tax on Social Security benefits on top of the federal tax, with details on each states tax policy.