Social Security benefits are a crucial source of income for millions of Americans in retirement. However, many retirees are surprised to learn that their benefits may be subject to federal and state taxes. The good news is that most states do not tax Social Security benefits.
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In fact, 41 states and Washington, D.C., currently do not tax these benefits. The states that do not tax Social Security benefits include Massachusetts, Mississippi, New Hampshire, North Carolina, North Dakota, Pennsylvania, South Carolina, and South Dakota. It is important to note that states’ tax rules can change from year to year.
In 2024, three states—Missouri, Nebraska, and Kansas—eliminated their Social Security taxes. While most retirees can avoid state taxes on their Social Security benefits, federal tax rules apply to everyone. The IRS uses a “combined income” formula to determine how much of a retiree’s benefits are taxable.
States not taxing Social Security
Combined income includes adjusted gross income (AGI), nontaxable interest, and half of the retiree’s Social Security benefits for the current year. Once the combined income is calculated, the IRS uses specific thresholds to determine how much of the benefits are taxable.
For married couples filing jointly, if combined income is between $32,000 and $44,000, up to 50% of benefits may be taxed. If combined income exceeds $44,000, up to 85% of benefits may be taxed. To illustrate how these rules work, consider a married couple with an AGI of $36,000, $1,000 in Treasury bond interest, and $24,000 in Social Security benefits.
Their combined income would be $49,000, meaning up to 85% of their benefits ($20,400) would be taxable at their regular income tax rate. If they are in the 22% tax bracket, they would owe $4,488 on their Social Security benefits. Understanding the tax implications of Social Security benefits is crucial for retirement planning.
While many states offer relief by not taxing these benefits, federal taxes can still significantly impact a retiree’s finances. By staying informed about these rules, retirees can make better financial decisions and enjoy a more secure retirement.
Cameron is a highly regarded contributor in the rapidly evolving fields of artificial intelligence (AI) and machine learning. His articles delve into the theoretical underpinnings of AI, the practical applications of machine learning across industries, ethical considerations of autonomous systems, and the societal impacts of these disruptive technologies.
