Taxes are an unavoidable fact of life, even after you stop working.
Uncle Sam can tax plenty of types of retirement income — including Social Security benefits. And the taxation doesn’t necessarily stop with the federal government.
Some state governments also expect a cut from your Social Security income.
As we reported in “How All 50 States Tax Your Retirement Income,” there are 13 states that tax Social Security benefits:
- Colorado
- Connecticut
- Kansas
- Minnesota
- Missouri
- Montana
- Nebraska
- New Mexico
- North Dakota
- Rhode Island
- Utah
- Vermont
- West Virginia
How Social Security income is taxed
Whether your Social Security retirement benefits are subject to federal income taxes depends on your tax filing status and what the U.S. Social Security Administration calls your “combined income.” That figure includes wages and self-employment income, interest and dividends, and other taxable income.
If your benefits are subject to federal taxes, Uncle Sam will tax up to 85% of your benefits. Again, the exact percentage of your Social Security income on which you must pay federal taxes depends on your filing status and combined income. We break it down further in “5 Ways to Avoid Taxes on Your Social Security Benefits.”
States that tax Social Security benefits do so according to their own regulations, which not only vary from state to state but also can differ from the federal tax code.
So, even if your benefits are not subject to federal taxes, they could still be subject to state income taxes — and vice versa. It depends on how a state taxes income and whether it offers any tax breaks that apply to Social Security income.
Connecticut, for example, offers certain taxpayers a full exemption from state income tax for benefits.
Residents of the Constitution State pay no taxes on Social Security income if one of the following situations applies:
- Their federal filing status is single or married filing separately, and their federal adjusted gross income is less than $50,000.
- Their federal filing status is married filing jointly, head of household or qualifying widow/widower, and their federal adjusted gross income is less than $60,000.
Have you taken a close look at your retirement income and tax burden? Share with us in comments below or on our Facebook page.
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