While your monthly Social Security payment mostly depends on what age you retired and how much you contributed over your lifetime, there’s another factor that could see reduced payments: where you live.
While the majority of states do not tax Social Security benefits, nine states still have tax rules that can lead to lower payments for seniors and those living with disabilities.
And because retirees often depend on Social Security for a substantial portion of their income, that tax can have long-reaching effects on their overall finances.
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The federal government already has rules that stipulate those with an individual income above $25,000 will see half their benefits taxed. And if you bring in an income beyond $34,000, up to 85 percent of benefits are eligible to be taxed.
The nine states that impose an extra tax on Social Security benefits are: Colorado, Connecticut, Minnesota, Montana, New Mexico, Rhode Island, Utah, Vermont and West Virginia.
Missouri, Nebraska and Kansas were on the list until recently, but lawmakers reformed that rule and got rid of the taxes in the last two years.
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The rules for the states that continue to tax Social Security vary, and each resident’s retirement circumstance can look a little different.
In Colorado, all taxpayers under age 65 with more than $20,000 in taxable benefits on their federal tax returns owe state income tax, but retirees 65 and older are excluded.
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In Connecticut, all Social Security income listed on your federal tax return can be subjected to taxes if you have an income above $75,000. The taxes, from 2 percent to 4.5 percent, will, however, be capped at 25 percent of your payments.
Minnesota rules permit taxpayers to deduct up to $4,560 in Social Security from taxable income, but residents with incomes above $78,000 miss out on that benefit.
The exact tax percentages differ in each state as well, with Montana adding on 4.7 percent to 5.9 percent, while Vermont has a larger range, of 3.35 percent to 8.75 percent.
New Mexico only taxes individuals making an adjusted gross income of $100,00 or more, while Rhode Island penalizes those who file for Social Security below their full retirement age with the state’s tax.
In Utah, the income requirement is much lower, at $45,000 for individuals.
“Most of these situations have taxation that only comes in if you make over a certain income in retirement and can even come in phases that eventually dwindle down to nothing over time,” Alex Beene, financial literacy instructor at the University of Tennessee at Martin, told Newsweek.
And for most of the states, Social Security is taxed because residents avoid a tax on something else in the state.
“For example, some states that don’t have a state income tax offset it by having a higher sales tax,” Beene said. “It’s the same process with these Social Security taxes, which unfortunately can make these locations less desirable for retirees.”
