With retirement getting more expensive, people want to figure out how to stretch their Social Security dollars as far as possible. You probably know things you can do to increase your profits, like increase your income today. But most people don’t think enough about avoiding taxes on Social Security benefits.
Not all states have them, but if yours does, you could lose a portion of your government checks each year. This is what you need to know.
These 38 states do not have taxes on Social Security benefits
The following 38 states do not tax Social Security benefits of any of its residents:
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- new hampshire
- New Jersey
- New York
- North Carolina
- North Dakota
- South Carolina
- South Dakota
If you live in Washington DC, you also won’t have to worry about district taxes on your Social Security benefits. But it’s a different story for residents of these 12 states:
- New Mexico
- Rhode Island
- West Virginia
But don’t panic if you live in one of these places because not all Social Security recipients in these states owe taxes. Each state government sets its own rules determining who owes, but generally it’s those with high incomes or high annual Social Security benefits. If you’re concerned, check with your state’s tax department to find out how it determines who pays taxes on Social Security benefits.
The federal government also taxes profits
Even if your state government doesn’t accept any of your benefits, the federal government may. Decide how much you owe by looking at your combined or provisional income. This is your adjusted gross income (AGI)plus nontaxable interest and half of your annual Social Security benefit.
Here’s what you could owe based on your combined income and filing status:
Up to 50% of taxable profits
Up to 85% of taxable profits
Provisional rent between $25,000 and $34,000
Provisional income greater than $34,000
Married Filing Jointly
Provisional rent between $32,000 and $44,000
Provisional income greater than $44,000
This does not mean that you will lose up to 85% of your benefits. It simply means that you could owe tax on that amount, but the amount you will owe depends on your tax bracket for the year. If you’re in the 12% tax bracket, for example, you may only owe 12% in taxes on up to 85% of your benefits.
Sometimes it is possible to avoid federal and state income taxes by adjusting your spending or relying more on your Roth savings account for withdrawals as you approach the income tax threshold. But if you don’t have Roth savings or need to spend more to cover essential expenses, this may not be an option.
If you know you’ll owe taxes, the best thing to do is accept them and set aside the necessary funds to cover the bill. Or if you get a surprise at tax time, talk to the IRS and see if you can set up a payment plan.
Being proactive is often the best approach. If you end up with a tax debt you can’t pay, the federal government could start garnishing your social security checks even before they reach you. Nobody wants that, so do your best to stay on top of all your taxes.
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