Social Security benefits can be a lifeline in retirement, but Uncle Sam could take a bite out of your monthly payments.
Even in retirement, your Social Security checks may be subject to both state and federal taxes. Exactly how much you will pay depends on where you live and your income, and many retirees will be taxable to some extent.
Fortunately, there are 38 states that don’t tax Social Security at all. Here’s what you need to know.
How government taxes affect your benefits
Each state has its own laws regarding Social Security taxes. So whether or not you are subject to state taxes depends on where you live.
The 38 states that do not tax Social Security include:
|Nevada||New Hampshire||New Jersey||new York|
|North Carolina||North Dakota||Ohio||Oklahoma|
|Oregon||Pennsylvania||South Carolina||South Dakota|
If you live in any of the 12 states do Tax Social Security, you may still be able to opt out depending on your state’s individual laws.
For example, in West Virginia, Social Security benefits are exempt from state taxes if your adjusted gross income falls below $50,000 per year for individuals or $100,000 per year for joint claimants.
Don’t forget federal taxes
Even if you can be exempt from state taxes, you could still owe federal taxes on your benefits regardless of where you live.
Your federal taxes depend on a number called your preliminary income. This is half your annual Social Security benefit amount, plus your adjusted gross income and any non-taxable interest.
For example, if you receive $20,000 a year from Social Security and withdraw $40,000 a year from your 401(k), your interim income is $50,000 a year. Here’s how much of your benefits might be subject to federal tax, depending on your interim income:
|Percentage of your benefits that are subject to federal taxes||Provisional income for individuals||Provisional income for joint applicants|
|0%||Less than $25,000 per year||Less than $32,000 per year|
|Up to 50%||$25,000 to $34,000 per year||$32,000 to $44,000 per year|
|Up to 85%||More than $34,000 per year||More than $44,000 per year|
However, there is a loophole when it comes to federal taxes. If you deposit into a Roth account (such as a Roth IRA or Roth 401(k)), those withdrawals will not count toward your interim income.
Having the bulk of your savings in a Roth account could reduce or potentially eliminate federal taxes on your benefits.
For example, if you collect $20,000 a year from Social Security and withdraw $40,000 a year from a 401(k), your interim income is $50,000 a year and up to 85% of your benefits are subject to federal taxes.
But if you were withdrawing $40,000 a year from a Roth IRA instead, that amount wouldn’t count towards your interim income. That means your interim income would be just $10,000 per year and none of your benefits would be subject to federal taxes.
Social Security and taxes can be confusing at times, but the more you know about how your retirement benefits will be taxed, the better prepared you will be for your senior years.
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