Here's an eye-opening fact: The bottom 40% of lifetime earners get more than 80% of their retirement income from Social Security. Without Social Security benefits , many millions of retirees would slip below the poverty level.
Thus, it's rather important to try to make your benefits as big as possible. There are multiple ways to do so -- and to try to hang on to all your benefit dollars. Fortunately, most states do not tax Social Security benefits. But nine states do.
The news isn't all bad, though. Here's a look at which states do and don't tax Social Security.
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The 9 states that do tax Social Security benefits
Here are the 9 states that do tax Social Security benefits:
- Colorado
- Connecticut
- Minnesota
- Montana
- New Mexico
- Rhode Island
- Utah
- Vermont
- West Virginia
This list has actually shrunk considerably in recent years as more and more states have stopped taxing benefits. Nebraska and Missouri are some states that have fallen off this list in recent years.
If you're bummed to see your state of residence on the list above, don't fret too much yet. Know that each state has its own rules for how it taxes Social Security benefits, and in some taxing states, you may not pay any tax at all. That's because some states restrict taxation based on age and/or income.
For example, in Colorado, residents 65 and older are exempt from having Social Security benefits subject to taxation. Beginning in the 2025 tax year, those in the age range of 55 to 64 with adjusted-gross income below $75,000 for single filers and $95,000 for couples filing jointly will also be exempt from paying taxes on Social Security benefits.
In Minnesota, heads of households and single filers with taxable earnings of $82,190 or less and married couples filing jointly with incomes of $105,380 or less are exempt from paying taxes on Social Security benefits. It's the same in New Mexico but with higher thresholds of $100,000 and $150,000, respectively.
So there's a good chance you'll pay little or nothing in Social Security benefit taxes.
The federal government does tax Social Security, though
As good as all that news above may be, here's some less-good news: The federal government does tax Social Security benefits. In fact, up to 85% of your benefits may be taxed federally . The table below offers details:
Filing As | Combined Income* | Percentage of Benefits Taxable |
|---|
Single Individual | Between $25,000 and $34,000 | Up to 50% |
Married, Filing Jointly | Between $32,000 and $44,000 | Up to 50% |
Single Individual | More Than $34,000 | Up to 85% |
Married, Filing Jointly | More Than $44,000 | Up to 85% |
Source: Social Security Administration.
*Your "combined income" is your adjusted-gross income, plus non-taxable interest, plus half of your Social Security benefits
The numbers in the table above do not mean that you'll face a 50% tax or that 85% of your benefits will be stripped away. Rather, they mean that those portions of your benefits may be taxed.
Planning for retirement
As vital as Social Security benefits are to your retirement, they'll likely deliver much less than you'll want or need. The average monthly Social Security retirement benefit was $1,920 as of August, amounting to only about $23,000 annually.
So you'll need to come up with a good retirement plan well before retirement, estimating how much income you'll need in retirement and how you'll get it. Most of us should be saving sufficiently and investing effectively for many years to amass sizable nest eggs. Note, too, that it can be smart to set up multiple-income streams in retirement -- perhaps from sources such as dividends, annuities, and interest.
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