Social Security benefits are the main source of income for many retirees, and that is why it is essential to control the amount of taxes on this income. If you are already on a limited income, it would be devastating to lose more of your benefits to state taxes.
For retirees, taxes impose additional financial pressure, especially if every cent matters. The good news is that there are a number of states that do not tax Social Security benefits so you will not be subject to state income tax on these benefits.
Why Some States Don’t Tax Social Security
Although the federal government is allowed to tax Social Security benefits if the income earned is above a certain limit, the majority of states do not. It often depends on tax measures intended to benefit retirees and let them retain as much of their earned benefits as possible. The reason for not taxing Social Security is to ensure that the elderly people who live on their pensions do not suffer more taxes on their only source of income.
The standard of living differs greatly between states in the United States and state taxes are a big factor in determining how expensive a state is for retirees. Understanding how your Social Security benefits will be taxed at the state level is crucial when planning for your retirement. It enables you to prepare for other expenses such as healthcare, housing, and other daily expenses.
States Where You Won’t Pay Taxes on Social Security Benefits
Fortunately, most states in the United States do not tax Social Security benefits. They either have no state income tax or they allow Social Security benefits to be exempt from taxation. Here are the states where your Social Security benefits will be tax-free:
- 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
- Wyoming
- District of Columbia
These 41 states and the District of Columbia offer tax exemptions on Social Security income, which helps retirees retain more of their earnings.
Understanding State Income Tax and Retirement
In states that do not tax social security, retirees are in a better position to manage their benefits especially in areas with higher living costs. For instance, California and New York are states with relatively high costs of living, but none of these states tax Social Security benefits.
On the other hand, states like Florida and Texas, which have no state income tax at all, enable retirees to keep more of their income in their pocket, thereby making them pioneer states for those seeking to pay little or no taxes in retirement.
How This Impacts Your Retirement Planning
In the states that do not tax Social Security, you will get to keep a larger portion of your money. This can be quite beneficial in the long run, particularly if you depend on Social Security benefits to cover basic necessities such as food, medical care, and shelter. For example, if you are getting $2000 a month in Social Security, you may have to pay taxes on that amount in some states but not in any of the states mentioned above.
If you decide to retire in one of these states, you may be able to save hundreds or even thousands of dollars per year. This makes tax-friendly states an ideal place to retire and enjoy life without having to worry about high taxes on a limited income.
Also, in states that do not have an income tax like Florida, Texas, and South Dakota, you will not only escape paying taxes on your Social Security benefits but you’ll avoid state income taxes on any other retirement income you have, too.
