Seattle, Washington – Many retirees in the U.S. heavily rely on Social Security as their primary source of income, a recent analysis by AARP revealed. However, these benefits may come with taxation implications that could affect retirees’ financial well-being.
Taxation on Social Security benefits was introduced in 1984, following amendments signed into law by President Reagan in 1983. This law stipulated that up to 50% of Social Security benefits could be considered taxable income if the taxpayer’s total income exceeded specific thresholds.
Some states impose their own state income taxes on Social Security benefits, adding to the financial burden of retirees depending on these benefits. Fortunately, not all states tax Social Security benefits, with a majority opting not to do so.
In 2024, Missouri and Nebraska will join the list of states that do not tax Social Security benefits, providing relief to retirees in these states. However, ten states continue to tax Social Security benefits, including Colorado, Connecticut, and Vermont, among others.
The amount saved by retirees in states that do not tax Social Security benefits collectively amounts to millions of dollars annually. This financial relief allows retirees to retain more of their income rather than seeing it depleted by state taxes.
Calculating the savings on taxes from untaxed Social Security benefits involves understanding the effective tax rate paid on other income sources and applying that to the total amount of Social Security benefits received. This calculation can provide insight into the significant savings that retirees experience in states that do not tax these benefits.
Overall, the impact of state taxation on Social Security benefits can have a substantial effect on retirees’ financial stability and quality of life. By understanding the tax implications and available deductions, retirees can better navigate their finances and maximize their savings in retirement.