Many seniors depend heavily on their Social Security income once they enter retirement. And chances are, those benefits will play a big role in your ability to cover your senior living expenses, even if you do kick off retirement with a decent chunk of savings.
The good news is that most states do not impose their own taxes on Social Security income.
But there are 13 states that do tax benefits, and it’s important to know which ones have that policy before settling down in retirement.Image source: Getty Images.
The states that take a bite out of Social Security
The list of 13 states that tax Social Security benefits reads as follows:
Colorado
Connecticut
Kansas
Minnesota
Missouri
Montana
Nebraska
New Mexico
North Dakota
Rhode Island
Utah
Vermont
West Virginia
That said, retiring in one of these states doesn’t guarantee that you’ll lose some of your benefits to taxes. Most of these states offer exemptions for lower (and in some cases, moderate) earners that take taxes on benefits out of the equation. And so you shouldn’t necessarily rule out these states as your retirement home because they’re on this list. Some, in fact, may offer a lower cost of living than the other states you’re considering.
You may get taxed on benefits anyway
Another reason not to immediately write off these 13 states for retirement? You might lose a chunk of your Social Security income to federal taxes regardless of where you live as a senior.
Whether that’ll happen or not hinges on your provisional income. Provisional income is essentially your non-Social Security income (including tax-free interest income you collect, such as that paid by municipal bonds) plus 50% of your annual Social Security benefit.
Federal taxes on Social Security begin to apply when singles have a provisional income of $25,000 or more, and when married couples filing joint tax returns have a provisional income of $34,000 or more. Clearly, these thresholds aren’t very high, which means a lot of seniors risk having a portion of their benefits taxed. And so it doesn’t necessarily pay to go out of your way to avoid a state that taxes benefits when you might fall victim to that fate anyway.
How to choose the right state for your retirement
Deciding on the right place to live in retirement is crucial. While it’s OK to consider the way different states treat Social Security income, you should also look at factors such as:
Housing costs, including property taxes
Healthcare, including the quality of providers and availability of Medicare Advantage plans
Climate, as that could affect your daily quality of life
Proximity to family and friends
The availability of senior-specific centers and resources
Access to the entertainment you want, whether it’s nightlife or a series of parks and hiking trails
While it would be nice if all states just left Social Security benefits alone, that isn’t the reality. But state taxes on that income also don’t have to be a deal-breaker — especially since you might end up getting your benefits taxed regardless.
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