There's a lot to think about when deciding where you plan to retire: the weather, your family, and the cost of living, to name a few. But one factor you may want to add to that list is whether the state government is going to demand a slice of your Social Security benefit.
If you want to hold on to more of your hard-earned benefit, consider spending your senior years in one of 37 states.
The 37 states that don't tax Social Security benefits
You won't owe state taxes on your Social Security benefit if you live in:
- Alabama
- Alaska
- Arizona
- Arkansas
- California
- Delaware
- Florida
- Georgia
- Hawaii
- Idaho
- Illinois
- Indiana
- Iowa
- Kentucky
- Louisiana
- Maine
- Maryland
- Massachusetts
- Michigan
- Mississippi
- Nevada
- New Hampshire
- New Jersey
- New York
- North Carolina
- Ohio
- Oklahoma
- Oregon
- Pennsylvania
- South Carolina
- South Dakota
- Tennessee
- Texas
- Virginia
- Washington
- Wisconsin
- Wyoming
And there's good news for West Virginia residents: Beginning in 2022, that state also will no longer tax Social Security benefits. So if you live there and are thinking about signing up for benefits, waiting until next year will let you keep more of your money (and you may also qualify for larger checks by waiting).
What if you live in a state that taxes Social Security benefits?
If you live in one of the 13 states (soon to be 12) that tax Social Security benefits, you won't necessarily owe your state government anything. Nine of these states -- excluding Minnesota, North Dakota, Vermont, and West Virginia -- have exemptions that can help many seniors hold on to their benefits.
For example, Colorado doesn't require Social Security recipients under 65 to pay taxes on their first $20,000 in benefits for the year. And recipients 65 and older don't have to pay taxes on their first $24,000 per year. Other states have similar rules.
Check with your state revenue department to learn how it handles taxes on Social Security benefits; it may even help you avoid taxes in some cases. If your state grants exemptions to Social Security beneficiaries who have an adjusted gross income (AGI) below a certain threshold, as is the case in Connecticut, you may be able to avoid taxes by keeping your spending low or being careful about which retirement account you withdraw from. Roth withdrawals are tax-free, so taking money from these accounts if you have them can help you keep your AGI lower while still giving you the money you need.
Avoiding state Social Security benefit taxes isn't always possible, so understanding what your state might charge will keep you prepared at tax time, and help you estimate how much you need to budget for them.
Does the federal government tax Social Security benefits?
Even if you live in one of the 37 states listed above, you could still owe taxes on your Social Security benefits. The federal government depends on benefit taxes as one of the revenue sources for the program itself.
You could owe taxes on up to 50% of your benefit if your provisional income (defined as money you get from all non-Social Security sources, plus half your annual Social Security benefit) exceeds $25,000 as a single adult or $32,000 as a married person. And you could owe taxes on up to 85% of your benefit if your provisional income exceeds $34,000 if you're single or $44,000 if you're married.
But that doesn't mean you'll actually pay that much. It all depends on your income and tax filing status. Here's an in-depth guide to figure out how much you could actually owe.
Like state taxes, you may be able to avoid federal Social Security benefit taxes by limiting your annual spending from taxable retirement plan benefits or withdrawing more money from Roth sources every year. But avoiding these taxes isn't always possible. So you just have to prepare for them when building your retirement plan.
Taxes on Social Security benefits aren't the only factor -- or even the most important one -- to consider when deciding where to live in retirement. But they could have a significant effect on how much you can afford to spend in your senior years. So revisit your retirement plan and factor them in, if you haven't already, to avoid any costly surprises in retirement.
This article originally appeared on The Motley Fool.
