DENVER, Colorado – Social Security beneficiaries received a significant cost-of-living adjustment, the largest in four decades, in 2023. However, this increase in payments might result in a financial hit during tax season.
While federal taxes on Social Security income are a known fact for retirees, it’s essential to be aware that some states also impose taxes. Around a dozen states are currently taxing Social Security benefits, but this number is expected to decrease in the next year.
Each state has its own criteria for taxing Social Security income, often based on factors like age and income. For example, in Colorado, those 65 years and older can subtract their full Social Security benefits from their state tax returns if their federal taxable income exceeds a certain threshold.
Similarly, in Connecticut, single recipients with adjusted gross income (AGI) below $75,000 and married joint filers with AGI below $100,000 are not taxed on their benefits. However, if their income exceeds those limits, 25% of their benefits may be taxed.
In light of these varying state tax laws, it’s crucial for retirees to understand the specific rules in their state. This knowledge can help individuals plan their finances to avoid unexpected tax hits during retirement.
Several states are moving towards eliminating or reducing taxes on Social Security benefits. In Missouri and Nebraska, for instance, no tax will be imposed on Social Security income beginning in tax year 2024.
To mitigate taxes on Social Security benefits, retirees can also explore options like investing in a Roth IRA, which offers tax-free withdrawals. Additionally, staying informed about the changing tax laws in their state can help retirees make educated decisions about their financial planning.
As states continue to adjust their tax laws related to Social Security benefits, retirees should stay informed and seek professional advice to make the most of their retirement income. Understanding these ever-changing tax laws can be crucial in maintaining financial stability during retirement.