Some Retirees Will Lose Some Social Security Benefits This Year

A sign outside a U.S. Social Security Administration building in Burbank, Calif., on Nov. 5, 2020. (Valerie Macon/AFP via Getty Images)

Where you live determines many things, including how you will be taxed. Most states do not tax your retirement income, but some do.

Currently, 12 states will tax your Social Security benefits, which will cause you to lose some of your benefits. If you live in one of those states, you will get fewer benefits than you would if you lived elsewhere.

Not every retiree living in those states will get taxed on their Social Security, but many will. The taxes are based on your annual income. Not only will those states charge you taxes but the Social Security Administration (SSA) may also withhold some of your benefits if you earn more than specific limits.

The States That Will Tax Your Social Security

Right now, 10 states will tax your Social Security income. There were 12, but Finance.Yahoo says Missouri and Nebraska dropped this tax at the start of this year.

Those states are Colorado, Connecticut, Kansas, Minnesota, Montana, New Mexico, Rhode Island, Utah, Vermont, and West Virginia. Kansas, however, does not tax your Social Security benefits if your federal adjusted gross income is less than $75,000.

These 10 states have tax rules that reduce how much taxes you pay on your benefits so that you can keep most of them. Each state has different rules, so you must learn what those rules are if you are looking for a low-tax state to move to.

Many states do not levy an income tax on Social Security benefits if you have low income. Several states do not tax your benefits if your income is less than $50,000 for singles, such as Vermont and West Virginia, $75,000 for singles, including Connecticut, $78,000 in Minnesota, and $95,800 in Rhode Island.

The married filing jointly can earn up to $65,000 in Vermont without taxes on their benefits, $75,000 if they live in Utah, $100,000 in Connecticut and West Virginia, and $119,750 in Rhode Island. Kansas does not tax your benefits if your federal adjusted gross income is $75,000 or less.

The state with the highest exemption for retirees is New Mexico. In that state, singles can earn up to $100,000, and those married filing jointly can earn up to $150,000 before being taxed on their Social Security benefits.

Some Taxes on Social Security Depend on Your Income

There are two tiers that the Social Security Administration has for your income level. Even if you earn more than the limit in these tiers, you will not be taxed on all of your Social Security benefits. SmartAsset indicates that for 2024, you will never pay taxes on more than 85 percent of your income from Social Security.

The Internal Revenue Service charges taxes based on your combined income. It consists of your adjusted gross income, your nontaxable interest, plus one-half (50 percent) of your Social Security benefits. The 50 percent tier applies to singles who earn $25,000–34,000. Married couples filing jointly earning $32,000–44,000 must pay taxes on 50 percent of their Social Security benefits. People with less than these amounts will not pay any taxes on their Social Security benefits.

The second-tier charges taxes on 85 percent of your Social Security benefits if you are single and earn more than $34,001. Married couples filing jointly who earn $44,001 or more must pay taxes on 85 percent of their Social Security benefits.

Earning Limits While on Social Security

Besides the IRS taxes, the SSA will also withhold some of your benefits if you earn too much. If you earn more than $22,320 in 2024, 50 percent of your benefits will be withheld.

In the year that you reach your full retirement age, you can earn up to $59,520 in 2024. It applies only up to your birthday month when you reach full retirement age. In your birthday month and afterward, there is no limit on how much you can earn. It will not affect your Social Security benefits.

In the month you turn 67 (or when you reach your full retirement age), NerdWallet says you can earn as much as you want and will not pay any taxes on your Social Security benefits. You will still need to pay taxes on any other taxable income.

Some States Do Not Tax Income Taxes

You want to keep as much of your retirement money as possible. The AARP reveals that 13 states do not have an income tax. One state, Alaska, even pays their citizens $1,312 each (the 2023 amount).

Invest in Roth Retirement Accounts

If you have investments in a Roth IRA or a Roth 401(k), you will not pay any taxes on your withdrawals. Money contributed to these accounts is after tax, and the money rolled into them is also taxed, but putting some of your retirement money in these accounts will help keep your taxes lower in retirement. Roth accounts also do not have required minimum distributions.

A health savings account (HSA) can also help you save money because withdrawals are not taxed when used for qualified medical expenses. Contributions are made pretax and are deductible in the year you make them. These accounts require a high-deductible health plan but will also help you save for retirement.

Moving to another state to avoid state taxes on your Social Security benefits may not be worth it because some states offer additional tax benefits to retirees. Before deciding to move, talk to a tax accountant or tax advisor to learn more about what taxes you must pay in your state after you retire.

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