Retirees in these 12 states are at risk of losing some of their Social Security checks | Smart Change: Personal Finance

(Kailey Hagen)

Most seniors rely on Social Security benefits to cover their expenses, but it’s not always easy to know how much you’re getting. There are several factors that affect this, including your age at which you apply, your year of birth, and your income throughout your career.

And if you live in one of the 12 states below, you also have to worry about Social Security benefits taking up a big chunk of your checks. Sometimes it is possible to avoid these, but not always. Here’s what you need to know to keep as many of your Social Security checks as possible.

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These 12 States Tax Social Security Payments

The following 12 states tax a portion of their seniors’ Social Security benefits:

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  1. Colorado
  2. Connecticut
  3. Kansas
  4. Minnesota
  5. Missouri
  6. Montana
  7. Nebraska
  8. New Mexico
  9. Rhode Island
  10. Utah
  11. Vermont
  12. West Virginia

But living in one of these states does not guarantee that you owe anything. Each state has its own rules governing who pays Social Security benefits. Typically, your annual benefit or adjusted gross income (AGI) must exceed a certain threshold. For example, if your AGI in Kansas is less than $75,000, your Social Security benefits are automatically tax-exempt.

Review the laws for your state so you understand whether you are at risk of paying these taxes. You should also double check this when you retire. Some states may change or abolish their Social Security benefits tax in the future.

The federal government also taxes Social Security benefits

Even if you don’t live in one of the 12 states mentioned above, you may still owe federal Social Security taxes. It all depends on your provisional income. This is your AGI plus any non-taxable interest and half of your annual Social Security benefit.

The following table shows how much of your benefit the federal government can tax based on your preliminary income and tax return status:

Percentage of Social Security Benefits Subject to Federal Taxes

Provisional income for some filers

Provisional income for married couples filing jointly

0%

Less than $25,000

Less than $32,000

Up to 50%

$25,000 to $34,000

$32,000 to $44,000

Up to 85%

Over $34,000

Over $44,000

Data source: Social Security Administration.

These thresholds may change over time, so check every few years and before applying for benefits to understand what you may owe.

How to Avoid Social Security Taxes?

Avoiding Social Security benefits isn’t always possible, but some succeed with careful planning. One of the best things you can do to avoid these taxes is to put money into a Roth IRA. Unlike most retirement accounts, Roth IRAs require you to pay taxes on your contributions the year you make them. But in return, you get tax-free withdrawals later. This means you can withdraw as much as you want each year and the federal government doesn’t count it in calculating your provisional income.

If you have access to a Roth 401(k) through your job, you can use it too. The government taxes these funds in the same way as Roth IRA funds, and you can transfer your Roth 401(k) into a Roth IRA if you leave the job.

Those who have a lot of savings in traditional IRAs or 401(k)s may also want to consider a Roth IRA conversion. This is where you turn tax-deferred savings into Roth savings by paying tax on the amount you turn in that year. But you have to be careful to do this. It will increase your taxable income for the year. Converting too much at once can put you in a tax bracket, forcing you to pay a larger percentage of your savings to the government. You can avoid this by making several smaller Roth IRA conversions in consecutive years.

Another thing you can try to reduce your chances of paying Social Security benefits is to limit your retirement expenses. Doing so can reduce the amount you withdraw from traditional retirement accounts, lowering your AGI. But you probably shouldn’t rely on this strategy alone as you can’t always control how much you spend. Unexpected costs can force you to take out more than you’d like. That’s why it’s a better approach to have some Roth savings on hand if you’re trying to reduce your tax liability.

It’s best to think about this now, even if you’re not yet claiming Social Security. Knowing how much you owe will help you avoid tax surprises. But be prepared to make adjustments if your retirement plans or the rules around Social Security tax benefits change over time.

The $18,984 Social Security Bonus Most Retirees Completely Overlook

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