Preparing for retirement and leaving your job behind often creates the opportunity to live in another part of the country. While researching the “best places to live,” some look for retirement havens where there is no sales tax. While that’s a wise step, it’s certainly not the only one to consider. Fourteen states that collect income taxes also want part of your social security check.
According to an AARP survey, about half of all retirees depend upon Social Security to pay for 50 to 90 percent of their living expenses. The average Social Security check in 2011 is $1,177 per month, while the maximum could be as high as $2,366 monthly. These payouts mean an “average” couple could be paid around $2,350, while those at the maximum could receive over $4,700 per month. Some of these Social Security benefits could be taxable at the Federal level and at the state level in these 14 states: Colorado, Connecticut, Iowa, Kansas, Minnesota, Missouri, Montana, Nebraska, New Mexico, North Dakota, Rhode Island, Utah, Vermont and West Virginia.
What the IRS wants
According to the IRS (Publication 915) Social Security is taxable according to a “base amount” that ranges from zero to $32,000. These base amounts are:
$25,000 if you are single, head of household, qualifying widower or married filing separately and lived apart from your spouse for the entire year.$32,000 if you are married and filing jointly.Zero dollars if you are married and filing separately and lived with your spouse at any time during the year.
To compute your tax liability, add one-half of your Social Security income to all other income for the year. If that sum is less than the relevant base amount, none of your Social Security benefits are taxable.
If the sum is greater than the relevant base amount, the IRS will tax a portion of your Social Security income, usually 50 percent. However, if the total of one-half of your benefits and all other income is more than $34,000 ($44,000 if you are married and filing jointly) or, you are married filing separately and lived with your spouse at any time during the year, then 85 percent of your Social Security will be taxed.
What the state wants
Most states that tax Social Security base their rates on one’s Federal Adjusted Gross Income (AGI). Rhode Island, for example, exempts Social Security from taxation only for individuals with AGI under $50,000 ($60,000 if married filing jointly). Minnesota estimates that it “costs” the state $194.8 million because their collection policies conform with Federal guidelines, as opposed to setting much higher thresholds.
No matter where you might consider relocating, be sure to look over the entire taxation scheme in the state you’re considering. The cost of sales taxes and property taxes could be even greater than the state’s income tax and that portion of your Social Security check.
