40 States That Don’t Tax Social Security Benefits

40 States That Don’t Tax Social Security Benefits

Social Security plays a major role in the financial lives of millions of Americans. For some, this represents virtually their entire retirement income; for others, it represents a significant portion of their retirement income; and for still others, it is rather a significant advantage. Regardless of the role Social Security will play in your retirement finances, it’s essential to understand the tax implications of your benefits so you can plan accordingly.

The only wrinkle Social Security is that retirees in 10 states can have their benefits taxed at the state level. The best news, however, is that this leaves 40 states where retirees don’t do it you have to worry about these taxes.

40 States That Don’t Tax Social Security Benefits

Image source: Getty Images.

Here are the 40 states (including the District of Columbia) that do not tax Social Security benefits:

  1. Alabama

  2. Alaska

  3. Arizona

  4. Arkansas

  5. California

  6. Delaware

  7. Florida

  8. Georgia

  9. Hawaii

  10. Idaho

  11. Illinois

  12. Indiana

  13. Iowa

  14. Kentucky

  15. Louisiana

  16. Maine

  17. Maryland

  18. Massachusetts

  19. Michigan

  20. Mississippi

  21. Missouri

  22. Nebraska

  23. Nevada

  24. New Hampshire

  25. New Jersey

  26. new York

  27. North Carolina

  28. North Dakota

  29. Ohio

  30. Oklahoma

  31. Oregon

  32. Pennsylvania

  33. Caroline from the south

  34. South Dakota

  35. Tennessee

  36. Texas

  37. Virginia

  38. Washington

  39. Wisconsin

  40. Wyoming

An encouraging sign for those who live in one of the 10 states that still tax Social Security benefits is that states have slowly but surely begun to eliminate the tax. Missouri and Nebraskafor example, taxed Social Security benefits through early 2024, and West Virginia is on track to completely eliminate its Social Security taxes by 2026.

Social Security tax rules can change from year to year, so it’s important to stay up to date on the rules in your respective state. Most of the changes involve states eliminating the tax, but that doesn’t mean a situation can’t arise where a non-taxing state decides to add the tax back. Staying up to date ensures that you are not caught off guard and unable to plan your finances accordingly.

Regardless of your state’s specific rules regarding Social Security taxation, the federal rules apply to everyone. To determine your tax liability, the IRS uses your “combined income,” which includes your adjusted gross income (AGI), any tax-free interest (such as municipal bond interest), and half of your annual Social Security benefits.

For example, if your AGI is $60,000, you receive $24,000 in annual Social Security benefits, and you have $1,000 in tax-free interest, your combined income would be $73,000. Here’s how the IRS might tax your benefits based on combined income and filing status.

It is important to note that the percentages above do not represent the amount of your benefits that are taxed, but rather the amount that represents eligible be imposed. The portion of your Social Security benefits that is taxable is added to your other income and then taxed at your regular income tax rate.

As an example, imagine a single filer has a combined income of more than $34,000, receives $20,000 per year in Social Security, and is in the 22% tax bracket. If 85% of their benefits are taxable ($17,000), $17,000 would be added to their taxable income and taxed at 22%, resulting in a debt of $3,740 on their Social Security benefits.

Remember: Social Security changes are common and the best thing you can do is make sure you are as informed as possible about the rules relevant to your personal situation. The last thing you want is to be caught off guard with an unexpected tax bill.

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40 States That Don’t Tax Social Security Benefits was originally published by The Motley Fool

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