"I'm proud to pay taxes in the United States; the only thing is, I could be just as proud for half the money." — radio broadcaster Arthur Godfrey
Taxes are necessary. They keep our government running, and pay for schools, courts, roads and much more. Still, no one wants to pay any more than they have to, and most of us would rather pay less than we pay. So as you approach and enter retirement, you might be wondering which states won't tax your Social Security benefits.
Here's some good news: Fully 40 states — plus the District of Columbia — don't tax Social Security benefits. Even better, their ranks have been growing. Roughly a decade ago, only 27 states didn't tax Social Security. (Nebraska and Missouri are among the most recent additions to the list.) Below are the 40 non-taxing states:
To save you some hunting, here are the states that do currently tax Social Security benefits:
Don't despair if the state you live in is on this list — because you may still end up owing your state $0 in Social Security taxes. Each state handles the taxation of Social Security in its own way, and many states have a light touch, exempting lower earners and/or older citizens.
In Colorado, for example, your benefits are free from taxation once you turn 65. And in Kansas, only those whose adjusted gross income (AGI) tops $75,000 face taxation.
There's a good chance that your state won't tax your Social Security benefits, but there's also a good chance that the federal government will. In fact, up to 85% of your benefits may be taxed federally. The table below offers details:
If you're suddenly thinking of relocating to a state that doesn't tax Social Security, hold on. You need to take a state's total tax picture into account, not just its taxation (or non-taxation) of Social Security benefits. Consider your particular situation, as well.
Understand that every state needs money to keep the lights on (and more). Some get that money via relatively heavy taxation of income, while others might not tax income at all, but might collect a lot of revenue from property and/or sales taxes. So depending on the value of your property, your shopping habits and your retirement income, some states will offer a better cost-benefit proposition, tax-wise, for you than others.
That's the scoop on Social Security taxation in retirement — and the news is mostly good. Most people won't face state taxes on their benefits, and among those who do, there's a good chance they'll pay relatively little.
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