Social Security is a significant part of their retirement income for many Americans. Depending on your overall household income, you may owe taxes on your Social Security benefits. Furthermore, your state of residence will determine the amount of taxes you will owe on your Social Security benefits at the state level during retirement. If it wasn’t obvious, minimizing taxes on your Social Security benefits is like getting a raise on your retirement paycheck.
If your household makes enough money, the IRS may take a cut of your Social Security benefit via federal income taxes. The tax news is a bit better for Social Security recipients at the state level. At this time, 38 states will not be taxing your Social Security. To state the obvious, that leaves 13 states, soon to be 12, that will tax your Social Security benefits at some level.
While I don’t think I’d recommend that my financial planning clients move to reduce taxes on Social Security benefits, it is something to at least be aware of if you are considering moving in retirement. That being said, I am a Los Angeles financial planner. While California does have a reputation as a high-tax state, surprisingly, it does not tax your Social Security benefits. Also, the tax system in California is progressive (you pay higher rates as your income grows), leading to lower tax bills for many mid-to-low-income Californians compared to what they would owe in other states with a flat tax.
States That Won’t Tax Your Social Security Benefits
In alphabetical order, Alabama, Alaska, Arizona, Arkansas, California, Colorado, 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, West Virginia, Wisconsin, Wyoming.
2022 is the first year that Social Security benefits will not be taxable in West Virginia.
It will be interesting to see if any other states follow suit and drop their taxation of Social Security benefits. Millions of Americans are not anywhere near being on track for a secure retirement. Therefore, they will need every penny of their Social Security benefits. Similarly, the states will also need every single cent of tax dollars they can get to provide services to help keep their retirees out of poverty.
An estimated 60% of retirees will not owe federal taxes on their Social Security benefits. Many will also not owe state taxes on their Social Security retirement income. From a tax standpoint, this is excellent news. However, from an income standpoint, it may not be great for your standard of living.
If your total taxable income hits $25,000 as a single retiree or $32,000 as a married couple, your Social Security benefits will begin to get taxed at the federal level. Not exactly an income that will leave you living a worry-free retirement. Just 50% of your Social Security income will face federal taxation at the income levels listed above. Once your income reaches $34,001 single or $44,001 married, 85% of your Social Security benefits will face taxation from the IRS.
Planning for a Secure Retirement In 2022
Regardless of where you live, even the maximum Social Security benefit will not be enough for you to live comfortably. If you are still working today, look for ways to invest a bit more into your retirement accounts and make sure your money is growing for your future. Also, look for ways to lower expenses in retirement. You might also consider working a few more years which will help increase your Social Security benefits and reduce the amount of money you will need to fund your eventual retirement.