Social security can be seen as a life saver and essential part of millions of Americans’ retirement finances.
The program is responsible for helping to keep more than 15 million Americans over the age of 65 out of poverty each year, according to the Center on Budget and Policy Priorities.
Whether those seniors are living above or below the poverty line, Social Security matters as it plays a significant role in budget and retirement planning.
Retirement is the time seniors look forward to reaping the benefits with a consistent income source after working. But even though they’re settling into retirement, that doesn’t mean the IRS goes away.
That’s why it’s crucial for retirees to try to keep as much of their Social Security check as possible. Unfortunately, retirees living in these 10 states could see a reduction in their benefits this year, depending on their income.
Most states don’t tax Social Security benefits, but 10 states do: Colorado, Kansas, Minnesota, New Mexico, Connecticut, Montana, Utah, Rhode Island, West Virginia and Vermont, The Motley Fool reported.
So, for those retirees who live or move to one of those states and are receiving Social Security benefits, it’s imperative to look over each state’s specific rules because they vary, with different guidelines and income thresholds.
Here’s how Social Security benefits are taxed.
The federal government has a metric called “combined income” which determines what portion, if any, of your Social Security benefits are taxable at a federal level.
Combined income is your adjusted gross income plus any non-taxable interest income, and half your Social Security income.
Let’s say your adjusted gross income is $60,000. If you receive $20,000 annually from Social Security and $1,000 from tax-exempt municipal bond interest, your combined income would be $71,000.
And here’s how much of your benefits are eligible for federal taxes, based on your combined income and filing taxes.
If your taxable portion of benefits are 0%, for an individual, it’ll be less than $25,000. For married individuals filing jointly, it’ll be less than $32,000.
If your taxable portion of benefits are up to 50%, for an individual, it’ll be $25,000 to $34,000. But for married individuals filing jointly, it’ll be $32,000 to $44,000.
If your taxable portion of benefits are up to 85%, for an individual, it’ll be more than $34,000. But for married individuals filing jointly, it’ll be more than $44,000, according to data from the Social Security Administration.
The thresholds are low. That’s due to the combined income thresholds that were established over 30 years ago and haven’t been adjusted for inflation. It makes it even more difficult to avoid paying taxes on Social Security.
So, if you skip out on planning your retirement account withdrawals and capital gains every year, there’s a real chance you could have a huge tax bill on your Social Security income. But the retirees in those 10 states could face a hard reality in 2024.