As tax season approaches, millions of Americans face the prospect of owing the IRS a substantial amount on their Social Security payments.
Despite the 3.2 percent cost of living adjustment (COLA) on Social Security payments this year, unintended consequences may impact many seniors’ tax returns, potentially placing them in a higher tax bracket.
Approximately 40 percent of Social Security recipients nationwide find themselves obligated to pay income taxes on their benefits, with the critical determinants being their filing status and combined income.
Those with additional substantial income, including wages, self-employment earnings, interest, dividends, and other taxable sources, may face significant tax liabilities.
Individuals with incomes ranging from $25,000 to $34,000 may incur income taxes on up to 50 percent of their benefits, while those surpassing $34,000 could see up to 85 percent of their benefits subjected to taxation.
Married couples experiencing a combined income between $32,000 and $44,000 may witness up to 50 percent of their benefits taxed, increasing to 85 percent for couples exceeding $44,000 in combined income.
The impact of state residency on Social Security taxation is evident in varying thresholds across states.
For instance, Connecticut exempts Social Security recipients with an adjusted gross income below $75,000 (or $100,000 for married joint filers) from taxes, while those with higher incomes may face a 25 percent tax on their benefits.
State Residency Crucial for Seniors
Similar exemptions are seen in New Mexico for individual filers below $100,000 and married couples earning less than $150,000.
However, individuals below Social Security’s full retirement age in Rhode Island are subject to benefit taxation.
Moreover, the tax year plays a role, with Nebraska exempting 60 percent of Social Security benefits in 2023, while no taxes will be levied on benefits in 2024.
In 2024, only ten states, including Colorado, Connecticut, Kansas, Minnesota, Montana, New Mexico, Rhode Island, Utah, Vermont, and West Virginia, continue to tax Social Security benefits.
The choice of residence becomes a crucial factor for seniors, as the state they live in can significantly impact their financial situation.
Zack Hellman, owner of Tax Prep Tech, emphasizes the importance of seniors being aware of state-level tax regulations, as these can affect overall income and potentially impact their quality of life, particularly for those heavily reliant on Social Security for retirement income.
As seniors receive their Form SSA-1099 in January, detailing total benefits received and the amount to report on federal returns, understanding these rules becomes essential for accurate financial planning during tax filing.