Social Security benefits are a crucial source of income for retirees across the United States. However, depending on where you live, you might have to pay taxes on these benefits.
In 2025, nine states will start taxing Social Security benefits, which could impact your retirement plans.
Which States Will Tax Social Security Benefits?
Nine states, including Connecticut, Rhode Island, and West Virginia, will begin taxing Social Security benefits in 2025.
Each state has its own rules for how these taxes will work, and income thresholds vary. For example, in Connecticut, you won’t be taxed on your Social Security benefits unless your adjusted gross income (AGI) exceeds $75,000 if you are a single filer or $100,000 if you file jointly with your spouse.
This means that if your income is below the threshold, you won’t owe taxes on your Social Security benefits. However, if you expect your income to be above these limits, you will likely have to pay taxes on your benefits.
How Can You Minimize or Avoid the Tax Burden?
If you live in one of these states and believe your Social Security benefits may be taxed, there are ways to reduce the impact on your income.
One option is to consider a Roth conversion. This involves moving money from a traditional retirement account like a 401(k) or IRA into a Roth IRA.
Unlike traditional accounts, Roth IRA distributions are not counted when determining if your Social Security benefits are taxable.
Keep in mind, though, that a Roth conversion is a taxable event, which means you’ll have to pay taxes on the amount you convert. Additionally, the full benefits of a Roth conversion won’t take effect until at least five years after the conversion.
Another strategy is to be smart about the timing of your income. If you can keep your total income below the taxable limit, you can avoid taxes on your Social Security benefits.
For instance, you might want to delay claiming Social Security until you are 70 years old. Doing so can increase your monthly Social Security checks, which will give you more retirement income in the future.
What Else Can You Do to Reduce Taxes on Social Security Benefits?
In addition to delaying your Social Security claim, you might want to consider withdrawing more from your savings early in retirement.
Drawing down on your investment accounts before you start claiming Social Security can help you stay under the taxable income limit when you do start receiving benefits.
Maximizing charitable contributions is another option to reduce your taxable income.
If you are 70-and-a-half or older, you may be able to donate your Required Minimum Distribution (RMD) directly to a charity. This allows you to reduce your taxable income without having to pay taxes on the distribution.
Read More:
- Dave Ramsey’s Advice on Social Security: Why He Recommends Taking Benefits Early? Even If the Fund Is at Risk!
- Major Problem With Social Security: Suze Orman’s Warning to All Americans!
Should You Relocate to a State Without Social Security Taxes?
41 states don’t tax Social Security benefits, so you may consider relocating to one of those states. However, taxes shouldn’t be the only factor when deciding where to live in retirement.
Moving to another state can be expensive and may come with other challenges, so it’s important to weigh all the factors before making such a big decision.
Seek Professional Advice
If you’re unsure how taxes will affect your Social Security benefits, it’s a good idea to consult a tax or financial professional.
They can give you personalized advice based on your specific financial situation. A financial expert can help you plan your withdrawals and develop a tax strategy that maximizes your retirement income while minimizing your tax burden.
By being aware of how Social Security taxes will impact you and planning, you can reduce the amount you pay in taxes and enjoy a more comfortable retirement.
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