Retirement, for many in the US, involves a significant reliance on Social Security benefits, with approximately one in seven retirees depending on it for a substantial portion of their income.
However, the journey towards financial security in retirement is not without its challenges, especially when it comes to the taxation of Social Security.
The Genesis of Social Security Taxation
The taxation of Social Security benefits was set in motion in 1984, following the enactment of Amendments in 1983, signed into law by President Reagan. According to this law, up to 50% of Social Security benefits could be added to taxable income, contingent on the taxpayer’s total income surpassing specific thresholds.
Adding complexity to the financial landscape, some states impose their own income taxes on Social Security benefits. The good news is that not all states follow suit. Brian Kuhn, a Senior Vice President and financial advisor at Wealth Enhancement Group, highlights, “The list of states that do not tax Social Security is much longer than those that do.”
In a notable development, both Missouri and Nebraska have decided to cease taxing Social Security benefits starting in 2024, providing a sigh of relief for retirees in these states.
However, not all states are following suit, with only 10 states continuing to tax Social Security benefits in 2024. These states include Colorado, Connecticut, Kansas, Minnesota, Montana, New Mexico, Rhode Island, Utah, Vermont, and West Virginia. Each state has its unique tax provisions, providing deductions based on specific thresholds or ages.
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States Not Taxing Social Security in 2024
The majority of states, along with Washington, D.C., will not tax Social Security benefits in 2024.
The comprehensive list of states abstaining from taxing Social Security includes Alabama, Alaska, Arizona, Arkansas, California, Delaware, Florida, Georgia, Hawaii, Idaho, Illinois, Indiana, Iowa, Kentucky, Louisiana, Maine, Maryland, Massachusetts, Michigan, Mississippi, Missouri, Nebraska, Nevada, New Hampshire, New Jersey, New York, North Carolina, North Dakota, Ohio, Oklahoma, Oregon, Pennsylvania, South Carolina, South Dakota, Tennessee, Texas, Virginia, Washington, Wisconsin, and Wyoming.
Financial experts emphasize the importance of understanding the potential savings for retirees residing in states that do not tax Social Security benefits.
Brian Kuhn suggests a straightforward calculation by applying the effective rate of tax paid on all taxed income sources to the total Social Security benefits received.
For example, if an individual’s effective state tax rate is 5% and they receive $30,000 in Social Security benefits, the savings would amount to $1,500. Looking at the broader perspective, Jeff Rose, founder of Good Financial Cents, highlights substantial collective savings for retirees in states without Social Security taxes, such as around $309 million in Missouri and about $17 million in Nebraska.
As retirees navigate their financial landscape, understanding the nuances of Social Security taxation across states becomes paramount.
The decision of where to retire can significantly impact the overall tax burden on Social Security benefits, making it crucial for individuals to make informed choices for a financially secure retirement.
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