These 13 States May Be Coming for Your Social Security Benefit
By Sean Williams March 13, 2020

Social Security is easily our country’s most successful social program. For more than 80 years, Social Security has made guaranteed monthly payouts to eligible retired workers, with over 64 million people today receiving a benefit.

What’s more, these payouts are making a meaningful difference in the financial well-being of elderly Americans. Even though the average retired worker benefit is only $1,505.50 a month, as of January 2020, this payout is singlehandedly responsible for pulling more than 15 million retirees out of poverty.

But there’s something else Americans get with Social Security that they may not expect: the possibility of being taxed.

Yes, the federal government can tax your Social Security benefit

Back in 1983, the Reagan administration passed the last major overhaul of the Social Security program. The changes made came from both sides of the aisle, with Democrats successfully pushing for increases to revenue generation, and Republicans netting long-term outlay reductions via a gradual increase to the full retirement age. But the biggest change of all was the introduction of the taxation of benefits, which officially took effect in 1984.

The taxation of benefits, as introduced in the Social Security Amendments of 1983, allowed the Internal Revenue Service to apply federal ordinary income tax rates on up to half of an individual’s or couple’s Social Security benefit, depending on their income. If an individual’s or couple’s modified adjusted gross income (MAGI) plus one-half of benefits exceeds $25,000 or $32,000, respectively, they would be subject to this tax.

In 1993, under the Clinton administration, a second federal tier of taxation was added. If an individual or couple exceeds $34,000 or $44,000, respectively, using the same MAGI plus one-half benefits formula, then up to 85% of their Social Security benefits are subject to federal ordinary income tax.

What’s been a particular bummer about the taxation of benefits is that the income thresholds passed in 1983 and 1993 have never been adjusted for inflation. Therefore, a greater number of seniors are being taxed on their Social Security payouts at the federal level over time. According to nonpartisan senior advocacy group The Senior Citizens League, nearly half of all seniors now pay tax on their benefits.

These states may take a bite of your Social Security income, if given the chance

However, the tax buck doesn’t stop with Uncle Sam. Believe it or not, 13 states also tax Social Security benefits to some varied degree. Listed in alphabetical order, these states may take an additional bite out of your Social Security income, if given the opportunity:

Colorado
Connecticut
Kansas
Minnesota
Missouri
Montana
Nebraska
New Mexico
North Dakota
Rhode Island
Utah
Vermont
West Virginia

If you don’t see your state on this list, be thankful, for you’re living in one of the 37 states that doesn’t place a tax on Social Security income. This doesn’t absolve you from potentially owing federal tax on a portion of your benefits, but you won’t have to worry about your state trying to place its hand in the cookie jar, too.
IMAGE SOURCE: GETTY IMAGES.

As recently as a couple of years ago, there were four states whose treatment of Social Security income mirrored the federal tax schedule — Minnesota, North Dakota, Vermont, and West Virginia. At one time, this made these four states among the least friendly to retirees, at least in terms of falling victim to double taxation on your Social Security payout. But times have changed, and all four of these states have initiated new exemptions or thresholds that are designed to not sting as badly as those as the federal level. In fact, West Virginia will be a Social Security tax-free state by 2022.

There are also a handful of states that require seniors to earn quite a lot of money before coming after a percentage of their Social Security income. For example, Missouri allows single filers to earn up to $85,000 in adjusted gross income (AGI), and $100,000 in AGI for couples filing jointly, before the taxation of benefits would kick in. Even then, the Show-Me State allows for partial exemptions for those persons and couples exceeding these income thresholds.

It’s a similar story for Rhode Island, which is particularly generous to couples receiving a Social Security payout. Rhode Island adjusts its income thresholds for inflation every year, which placed its generous AGI thresholds at $81,900 for single taxpayers and $102,400 for married couples filing jointly in the 2018 tax year. In other words, you have to earn a lot of money in the Plantation State before being subject to a tax on your Social Security benefit.

While there are, undoubtedly, multiple variables retirees should examine when calling a state home, make sure state-level income thresholds tied to the taxation of Social Security benefits are on the list.

https://thebreadwinner.co/2020...al-security-benefit/

I know this comment will probably get me labeled a "liberal" or "socialist" or something, but...

I found out, after I retired, that all of our retirement income, both SS and the disbursement we're taking from our tax-deferred retirement account, was not subject to any state income tax.

I like "free money" (objections noted) as much as the next guy, but ISTM me that, retired or not, I'm still using state-supplied services. So ISTM that if my neighbour, who's working, is paying taxes for those state services, I should, too.

Change my mind.

quote:

Change my mind.

Probably an exercise in futility.

I have no problem with you wanting to pay more. By all means, go ahead. I do plenty of good with my money. I don't need to give more to the government in hopes of them doing the same.

quote:

Originally posted by ensigmatic:
I know this comment will probably get me labeled a "liberal" or "socialist" or something, but...

I found out, after I retired, that all of our retirement income, both SS and the disbursement we're taking from our tax-deferred retirement account, was not subject to any state income tax.

I like "free money" (objections noted) as much as the next guy, but ISTM me that, retired or not, I'm still using state-supplied services. So ISTM that if my neighbour, who's working, is paying taxes for those state services, I should, too.

Change my mind.

Don't you think that over your career you basically paid for the services you are now enjoying? Nothing stopping you from sending your state a check each year if you feel you are taking advantage of the system.

quote:

Originally posted by dave7378:

quote:

Change my mind.

Probably an exercise in futility.

How about I credit you with being open-minded and you do the same with me? Deal?

quote:

Originally posted by dave7378:
I have no problem with you wanting to pay more.

It's not a question of wanting to pay more. In my mind it's a question of fairness. Again: If my neigbours are paying to support the same government services I'm using, why should I get them for free when they do not?

You still get to pay. Don't overlook sales tax, property tax, registrations and fees.

Taxes all.

They weren’t “free” for you.

You paid your obligation, and at the sane time you paid the portion for those who had already retired before you.

Now you are paid in full, and your neighbor is paying his obligation, until they retire and the next will do theirs, until they retire.

You aren’t getting anything for free. You already paid your share. Don’t give them any ideas or the legislature might just bend you right over.

quote:

Originally posted by ensigmatic:

quote:

Originally posted by dave7378:

quote:

Change my mind.

Probably an exercise in futility.

How about I credit you with being open-minded and you do the same with me? Deal?

quote:

Originally posted by dave7378:
I have no problem with you wanting to pay more.

It's not a question of wanting to pay more. In my mind it's a question of fairness. Again: If my neigbours are paying to support the same government services I'm using, why should I get them for free when they do not?

Deal.

You are not getting them for free. Do you realize how many times you have ben taxed? Sometimes concurrently on the same income. If you set yourself up to have a tax free retirement why pay taxes just because someone else didn't have the same foresight or is in a position where they taxes are still a duty for them. The goal should be to pay as little tax as possible. Don't feel guilty about it. Charity and generosity will go a long way to helping assuage the guilt.

Fair enough, guys. Thanks for the discussion. Pretty much one of my best friends' position.

Not sure I'm buying it, but I can at least agree with the reasoning.

WV taxes EVERYTHING. No surprise here. My hillbilly brethren continue to suffer.

I pay for Part B Medicare coverage. In addition As I work part time the Medicare tax is still deducted from my check.

As others have said, add in property tax, sales tax, Federal Excise tax on firearms and ammunition,fishing gear, alcohol and many other items,Federal and state fuel taxes, vehicle sales tax and license plates, dog licenses, licenses and permits, we retirees are still doing our share.

My area AARP tax help has closeded all their Tax Aid Program for now. I have been taking Mother, 95, there for several years. I get mine done there too. I am not sure what to do now.

Actually, Nebraska already taxes my Social Security. All of it. Substantially. And everything else.

quote:

Originally posted by ensigmatic:
Fair enough, guys. Thanks for the discussion. Pretty much one of my best friends' position.

Not sure I'm buying it, but I can at least agree with the reasoning.

You already paid taxes previously, and the 15% or so that had been pulled out of your pay specifically to be reimbursed to you after you wait a long time for retirement. That was the agreement.

At 62-years-old, you can start collecting 75 percent of your benefit. You don't get to 100 percent until you turn 66. How long will you live? On average, might just make it to 80. That means 15 percent of your income for your entire working life - up to something like 130k this year - gets contributed to the system.... for 45 years or so.

So the government - on average - has to pay out about 16 years.

If you're single and pass away before you start collecting, nobody gets it. The government keeps it. If you're married and pass, your spouse collects only half of the money you contributed. (It's not your money...)

I feel I'm providing the government a huge loan over my lifetime to help them pay the benefits due at the time. I understand it, but it's a crappy investment. The rate of return is total crap, and for some it's a negative rate of return.

https://www.heritage.org/socia...ecuritys-rate-return

I don't think you should pay a dime of tax on social security benefits. Not one dime. There is no moral justification for it at all, especially since it's not treated as your money. Tax us on the income and treat it like a Roth IRA. (Yeah, I know it needs to be a more detailed plan, but I'm not going into all of that.)

Since I don't believe I'll be getting any benefits since the fund is scheduled to be bankrupt about the time I retire, it's difficult for me to get too broken up about the current generation having to pay taxes on the benefits.

If I get anything from Social Security, I'll consider it a bonus. In the meantime, I'm planning on having to pay it all myself. I'm sure, since I'll be better off in retirement than my peers who bought new cars, motorcycles, and boats while saving nothing, I'll be excluded from any benefit because I'll be too "privileged."

Whether social security or my 401(k), etc, I'd almost rather it all be taken out post-tax. Let it be taxed now when I'm making decent money and be disbursed tax free later (when, most likely, tax rates would be higher anyhow, though my aggregate income would be less.)

One reason I still live in KY (rather than IN, a bit more convenient) is that KY doesn't tax retirement income.

quote:

Originally posted by Doc H.:
Actually, Nebraska already taxes my Social Security. All of it. Substantially. And everything else.

We actually wanted to build just south of Scottsbluff/Gering, but with Nebraska’s taxes, it just didn’t make sense. I wrote to the governor and got a nice letter back from Heineman, but nothing has changed. Ridiculous taxation

quote:

Originally posted by steve495:
You already paid taxes previously, ...

I paid taxes, yes, but not on my SS, Medicare and 401K contributions. Those were all pre-tax contributions.

Most of the money that goes into Social Security goes into retirement benefits doesn't it?

I'm not sure on the percentages but if that is the case the return on your dollars is horrible so taxing it even more is ridiculous.