Retirees In These 10 States Risk Losing Some of Their Social Security Checks

The goal in retirement should be to have as many income sources as possible. The more income sources, the greater your financial security — and I’m sure most people would agree that financial security is well-earned by that stage in life.

One of retirees’ main retirement income sources is Social Security. It provides consistent income that can be a financial safety net for millions of people. Unfortunately, like other forms of income, there are tax rules surrounding monthly Social Security retirement benefits, on both the state and federal level.

On the state level, the number of states that possibly tax Social Security is declining, but there are still 10 holding on.

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Image source: Getty Images.

Which states may possibly tax Social Security?

As of the start of 2024, Social Security recipients in the following states risk losing some of their monthly Social Security checks to state taxes:

  • Colorado

  • Connecticut

  • Kansas

  • Minnesota

  • Montana

  • New Mexico

  • Rhode Island

  • Utah

  • Vermont

  • West Virginia

Social Security recipients need to stay current on their state’s annual rules because they can change yearly. For example, both Missouri and Nebraska had Social Security taxes on the state level until the start of 2024.

If you live in one of the above 10 states with Social Security taxes, you should check your state’s specific qualifications, because they can also vary.

Are you planning to head to the Midwest and retire in Kansas? An adjusted gross income (AGI) — which includes your paycheck, retirement account distributions, and investment income — above $75,000 would mean you’re subjected to state taxes regardless of filing status. Want to spend your golden years in the scenic lands of Utah? You’ll pay the flat 4.65% tax rate that’s applied to all income there.

Don’t forget about the federal government

Regardless of whether your state taxes Social Security benefits, there is no escaping Uncle Sam and the federal tax rules around Social Security. However, instead of using your earnings directly, the IRS determines your tax status using your “combined income.”

Your combined income is your AGI plus all nontaxable income and half of your yearly Social Security benefit. For perspective, nontaxable income could be interest earned from Treasury bonds or certain life insurance payouts.

To see combined income in action, let’s imagine someone’s AGI is $50,000. They receive $2,000 monthly ($24,000 annually) from Social Security, and earn an additional $500 from tax-exempt Treasury bond interest. In that case, their combined income would be $62,500.

Here is how much of their benefits are eligible for federal taxes based on their combined income and filing status:

Percentage of Benefits Added to Taxable Income

Filing Single

Married, Filing Jointly

0%

Less than $25,000

Less than $32,000

Up to 50%

$25,000 to $34,000

$32,000 to $44,000

Up to 85%

More than $34,000

More than $44,000

Data source: Social Security Administration.

How the federal Social Security tax works

The federal Social Security tax structure can be confusing, so it’s crucial to emphasize that these amounts aren’t how much your benefits will be taxed. Instead, it’s how much of your benefits are eligible to be added to your taxable income.

For example, if you’re married and filing jointly and have a combined income of $45,000, 85% of your Social Security benefit won’t be taxed. However, up to 85% of the $45,000 ($38,250) can be added to your taxable income. From there, the IRS will tax it at your typical income tax rate. If you’re in the 24% tax bracket, you would owe 24% on the taxable portion of Social Security benefits.

Understanding your state’s and the federal Social Security tax rules can help you properly plan your retirement finances. Even if you don’t currently have to pay taxes, staying up to date is important because Social Security rules are always subject to change.

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Retirees In These 10 States Risk Losing Some of Their Social Security Checks was originally published by The Motley Fool

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