Planning for your retirement might involve moving closer to family or to a warmer climate, but if you haven’t considered taxes on your Social Security benefits, you could be missing out. The fact is that the taxability of Social Security varies from state to state — considerably. For instance, retirement income is taxed in Colorado, Connecticut, Kansas, Minnesota, Missouri, Montana, Nebraska, New Mexico, North Dakota, Rhode Island, Utah, Vermont and West Virginia, but some states don’t even tax Social Security benefits, meaning that you can keep that much more in your pocket.
States With No Income Tax
The following states do not tax income, regardless of the source:
- South Dakota
This means that your Social Security benefits will not be subject to state tax, nor would any other income you receive, be it from a pension or any investments you hold.
Only Dividends and Interest
Even if you are retired and collecting Social Security benefits, you may still have income from investments. This includes interest income as well as any dividends paid. There are two states — New Hampshire and Tennessee — that tax this sort of income but not your Social Security benefits.
Finally, there are some states that will hold you exempt from paying income tax on your Social Security benefits. This only applies to qualified individuals, but if you make the cut, you won’t have to pay tax on retirement income in Illinois, Mississippi or Pennsylvania. In addition, the following states will hold you partially exempt if you meet certain qualifications:
- New Jersey
- New Mexico
- New York
- South Carolina
States generally taxing pension income include the following:
- District of Columbia
- North Carolina
- North Dakota
- Rhode Island
- West Virginia
Paying state taxes on your retirement and social security disability benefits could put a real dent in how much money you have to live on. Moving to a state with more favorable tax laws can be a great idea to help your retirement income stretch farther. However, remember that there are other taxes that vary from state to state, such as sales tax or property taxes. Depending on your situation, this could mean that some states are more favorable to your financial situation than others. Talk to a qualified tax professional to learn more.
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