Social Security is nothing short of a nest egg for the post-retirement life for over one-third of Americans. The fact that Social Security benefits include financial assistance and healthcare coverage for retired personnel makes it all the more important for the future of elderly citizens, or differently-abled individuals. And the good news is that nearly three-fourths of the states in the US do not tax Social Security benefits. Yes, 37 states in the US exempt Social Security Income from taxation!
Here’s a list of the 37 states of the US that do not tax Social Security benefits:
- Arkansas California
- New Hampshire
- New Jersey
- New York
- North Carolina
- South Carolina
- South Dakota
- Washington D.C.
However, there are 13 states that levy taxes on Social Security benefits. They are:
- New Mexico
- North Dakota
- Rhode Island
- West Virginia
Federal taxation of Social Security benefits
While a majority of the US states don’t tax Social Security benefits, you might have to to pay federal income tax on those benefits if your income goes beyond a particular threshold irrespective of what state you live in. Federal tax on Social Security benefits can be levied if:
- Your income exceeds $25,000 (single filers) or the combined income in your household is over $32,000 (married, filing jointly), up to 50% of your Social Security benefits will be taxed.
- Your income exceeds $34,000 (single filers) or the combined income in your household exceeds $44,000 (married, filing jointly), 85% of your Social Security benefits will be taxed.
Thus, if a significant part of your income comes from non-taxable sources such as Social Security benefits, savings in Roth IRA, etc., you will be exempt from taxation, but if a substantial portion of your income comes from other sources, you will have to pay federal income tax on your Social Security benefits. However, 85% is the limit here – you will not be taxed more than 85% under any circumstance.
Although the 37 states listed above may seem like great options for the post-retirement life, all of them are not necessarily tax-friendly states. Often when states exempt the Social Security benefits from taxation, they find other crafty ways to tax their citizens. For instance, while California does not levy a tax on Social Security, the average tax (state and local taxes combined) is as high as 8.48%, with an income tax bracket of 13.3%. Not just that, apart from Social Security benefits California taxes pensions, 401(k)s, and also traditional IRAs. So, when assessed carefully, it is not exactly a tax-friendly state.
On the other hand, states that tax Social Security benefits can be tax-friendly, such as West Virginia. The state has a low sales tax rate – an average of 6.2% – and the top income tax bracket also being low at 6.5%. Moreover, in West Virginia citizens can exclude up to $8000 (single) and $16,000 (married couples) of their retirement income from the state taxes.
Thus, when it comes to choosing a tax-friendly state where you can spend your retired life peacefully, you have to consider many things apart from Social Security benefits tax such as property tax, sales tax, local taxes, taxes on 401(k)s and income, to name a few. Each state has its distinct taxation norms and rules, and hence it is essential to know the taxation criteria of the state before you decide to move there.
Doubtful about which state you should choose? MyTaxFiler is here to help! Contact us at firstname.lastname@example.org, and we’ll be more than happy to guide you through every problem.