Regretfully, some retirees wind themselves with debts to their state or municipal government as well as the IRS.
If your provisional income reaches $25,000 for single filers and $32,000 for married joint filers, you may be taxed on up to 50% of your benefits at the federal level. Depending on your filing status, you may also be taxed on up to 85% of your benefits if your provisional income surpasses $34,000 or $44,000. Half of your benefits plus your adjusted gross income (AGI) plus nontaxable interest is your provisional income.
However, the regulations vary at the state level. Forty-one states do not offer tax benefits, whereas nine do. You might need to make some arrangements if you reside in one of these places in order to keep your government debt at bay.
In 2025, the following nine states will impose taxes on Social Security benefits:
- Colorado
- Connecticut
- Minnesota
- Montana
- Mexico
- Rhode Island
- Utah
- Vermont
- West Virginia
You are not required to pay taxes on your benefits just because your state is on the list. Since most states don’t tax you till you earn more than a specific amount, it depends on your income. For instance, you are exempt in Connecticut unless your AGI is greater than $100,000 for married joint filers or $75,000 for single taxpayers.
To verify the requirements, get in touch with the revenue agency of your state. There are a few things you may do to lower your tax bill or perhaps avoid paying it at all if you will be owed money.
Think about converting to Roth.
Whether you will be taxed on your benefits depends on your withdrawals from traditional retirement plans, like an individual retirement account (IRA) or 401(k). Conversely, Roth distributions are exempt from taxes and do not apply to the threshold.
You should speak with a tax expert before making this decision because a Roth conversion, which involves moving retirement assets like those listed above or, for example, a simplified employee pension (SEP) into a Roth IRA, is a taxable event. You might not be able to benefit from tax-free Roth withdrawals for at least five years following your conversion.
Use timing strategically.
If you can keep your income below the threshold when benefits start to be taxed, you won’t owe money. This can be accomplished in a number of ways, such as postponing your Social Security claim and taking larger withdrawals early on.
You won’t need to take out as much money when you turn 73 and start taking the mandatory minimum distributions if you take money out of your investment accounts earlier. This makes adhering to the exemption rules simple.
Additionally, each month you wait until you are 70 will increase your Social Security payouts, increasing your retirement income from that source when you finally apply for benefits. Future increases in Social Security benefits can help guarantee that you have sufficient funds to handle smaller withdrawals from investments at that point.
Just watch out that you don’t take out too much money from your accounts too soon after you retire. Determining a safe withdrawal rate and the most effective tax-minimization strategy requires consulting with a financial planner or accountant.
Make the most of your charitable donation.
Lastly, by staying below your state’s exemption threshold, you can reduce your income and avoid paying Social Security taxes by making charitable contributions.
According to the qualified charitable distribution legislation, you might even be permitted to make a direct contribution of your RMD, but you will need to fulfill certain requirements. These limitations include donating less than $108,000 (increased from $105,000 for the 2024 tax year), being 70 and a half or older, and having the charity receive the IRA dividend immediately.
Last Remarks
You might be able to lower or perhaps completely avoid paying Social Security taxes by taking these options into account. Moving to one of the 41 states that do not tax those benefits is obviously an option, but it might not be the best way to plan for your retirement years if you are only doing it to save money.
