Sarasota, Florida – As tax season approaches, many seniors on Social Security may find themselves owing thousands of dollars to the IRS. Although Social Security payments received a 3.2 percent cost of living adjustment this year, this increase could inadvertently push many seniors into a higher tax bracket, resulting in a larger amount of money being withheld from their payments. In fact, it is estimated that nationally, about 40 percent of Social Security recipients are required to pay income taxes on their benefits.
The amount of tax owed depends on factors such as filing status and combined income. Those with significant additional income, such as wages, self-employment earnings, interest, dividends, and other taxable income, can expect to owe a significant amount to the IRS. For individuals with an income between $25,000 and $34,000, up to 50 percent of their benefits may be subject to income tax. Once the income exceeds $34,000, up to 85 percent of the benefits may become taxable.
Married couples with a combined income between $32,000 and $44,000 can also expect up to 50 percent of their benefits to be taxed, with up to 85 percent of benefits from couples earning more than $44,000 being taxable. Additionally, beyond federal taxes, many states also tax Social Security income, although the rules vary widely.
In Connecticut, for example, Social Security recipients with an adjusted gross income below $75,000 (or $100,000 for married joint filers) are exempt from taxation, while in New Mexico, individuals earning less than $100,000 and married couples earning less than $150,000 are also exempt. Meanwhile, some states have more complex rules, with different tax thresholds for age and income.
The impact of choosing a state to reside in can have significant implications for a senior’s finances, especially for those heavily reliant on Social Security for retirement income. According to Zack Hellman, the owner of Tax Prep Tech, understanding these state-level tax rules is crucial for accurate financial planning and estimating tax liabilities. Seniors should be mindful of these regulations before filing their taxes, as they can have a substantial influence on their quality of life.
As seniors receive their Form SSA-1099 in January, which details their total benefits and the amount to be reported on their federal return, it is essential for them to be aware of the specific tax implications and regulations in their state of residence. The tax year and the state of residence can both significantly impact a senior’s financial situation and should be carefully considered.
In 2024, only 10 states continue to tax Social Security benefits: Colorado, Connecticut, Kansas, Minnesota, Montana, New Mexico, Rhode Island, Utah, Vermont, and West Virginia. Therefore, choosing the right state to live in can have a substantial impact on a senior’s overall income and quality of life.