Here Are the 37 States That Don't Tax
Social Security Benefits (and the 13 That Do)
Matthew Frankel, The Motley Fool,MotleyMay 28, 2018
Nearly three-fourths of U.S. states don't tax Social Security benefits at all, although your Social Security benefits can be taxed by the IRS regardless of where you live. Here's a quick guide to the 37 states that don't tax Social Security benefits, how Social Security is taxed on the federal level, and what you need to know if your state isn't on the tax-free Social Security list.
Most states don't tax Social Security benefits
Here's the easy answer: If you live in one of these 37 states (or Washington, D.C.), your Social Security benefits aren't taxed on the state level. They may, however, be subject to federal income tax, which we'll get to in a minute.
Data Source: Author's research.
How much federal income tax could you pay on Social Security benefits?
It also is important to point out that just because you live in a state that doesn't tax Social Security benefits, you still may have to pay federal income tax on them, regardless of where you live.
Specifically, the IRS uses an income test to determine if a portion of your Social Security benefits are taxable for federal income tax purposes. The IRS defines your "combined income" as one-half of your Social Security benefits and all of your other sources of income -- even non-taxable bond interest is included in this figure.
Here are the three key rules:
If your combined income is over $44,000 (married filing jointly) or $34,000 (all other filing statuses), as much as 85% of your Social Security benefits can become taxable income.If your combined income is over $32,000 (married filing jointly) or $25,000 (all other filing statuses), but below the 85% threshold, as much as 50% of your Social Security benefit can be taxable income.If your combined income is below the 50% thresholds, your Social Security benefits are not taxable.Generally speaking, this means if Social Security makes up the vast majority of your retirement income, your benefits will not be taxable. However, if you have substantial income from other sources, you could end up paying federal income tax on your Social Security benefits. And under no circumstances will more than 85% of your Social Security benefits count toward your taxable income.
Here are the 13 states that do tax Social Security benefits
It also is important to point out that the states that tax Social Security benefits don't all follow the same income test and rules as the IRS. In fact, only four do -- Minnesota, North Dakota, Vermont, West Virginia.
The other nine states -- Montana, Colorado, New Mexico, Utah, Nebraska, Kansas, Missouri, Connecticut, and Rhode Island -- all have their own rules when it comes to taxation of Social Security benefits, and some can be quite complex. For example, New Mexico gives Social Security beneficiaries a deduction, but the amount of the deduction and income limits for the deductions vary by age. Be sure to look into your state's rules if Social Security benefits are taxable.
Just one piece of the puzzle
There are many factors that determine how retiree-friendly (or not) any given state is, and while taxability of Social Security benefits is certainly one factor, it's a relatively small part of the big picture. Many states that don't tax Social Security benefits can be tax nightmares otherwise, while some of the states that do tax Social Security are actually quite tax-friendly in other ways.
The Biggest Social Security Lies You've Believed
Sean Williams, The Motley Fool,Motley Fool Sun, May 27 4:06 AM PDT When talking about America's most important social programs, Social Security is likely at or near the top of the list. Each and every month, more than 62 million people receive a Social Security benefit check, of which nearly 43 million are retired workers. Out of these almost 43 million people, data from the Social Security Administration shows that 62% are reliant on Social Security for at least half of their income. In other words, seniors would probably be in some deep trouble without this guaranteed source of monthly income.
But in spite of its importance, Social Security remains a source of great confusion for much of the American public -- workers and retirees included. A recently released survey from MassMutual found that nearly half of all older Americans (aged 50 or over) failed a five-question, true-false quiz. Meanwhile, a 10-question, true-false quiz from MassMutual conducted three years prior on adults of all ages found that 72% failed (i.e., answered six or fewer questions correctly).
Image source: Getty Images.
Have you fallen for these mammoth misconceptions?
As the old adage goes, "what you don't know can cost you," at least when it comes to Social Security. However, what you don't know can also let your imagination run wild. Over the years, some mammoth misconceptions and outright Social Security lies have gained steam, reshaping the perception of America's most important social program. Here are a handful of the biggest Social Security lies you may have believed, along with why they're completely wrong.
Social Security lie No. 1: Social Security is going bankrupt and won't be there for me when I retire.
Arguably the biggest Social Security lie is the idea that the program will soon be bankrupt and not able to provide a benefit to future retirees. This lie is perpetuated by the latest annual report from the Social Security Board of Trustees, which calls for a major shift come 2022. In four years, the program will begin paying out more in benefits than it's generating in income for the first time in 40 years. This shift is a result of a growing number of baby boomers entering retirement and thus lowering the worker-to-beneficiary ratio, an increase in longevity over many decades, and growing income inequality that has allowed the rich to live substantially longer (and collect a bigger Social Security check) than lower-income folks.
By 2034, a dozen years later, Social Security's approximately $3 trillion in asset reserves is expected to be completely exhausted. It's this excess cash depletion that has 51% of Americans, according to a 2015 Gallup survey, confident that they won't receive a dime from the program by the time they retire. Thankfully, more than half of all Americans are wrong.
Social Security has three funding mechanisms, and one of those funding sources ensures that the program is incapable of going bankrupt. Social Security's lesser funding sources are the interest earned on its asset reserves ($88.4 billion in 2016) and the taxation of Social Security benefits ($32.8 billion in 2016).
Image source: Getty Images.
Meanwhile, its 12.4% payroll tax on wage income between $0.01 and $128,400 (as of 2018) accounted for $836.2 billion of the $957.5 billion collected in 2016. As long as Americans keep working, the payroll tax will ensure that money is collected, which can be disbursed to eligible beneficiaries. This isn't to say that the current payout schedule is sustainable. According to estimates from the Trustees report, it's not. Benefits for current and future retirees may need to be slashed by as much as 23% to ensure that payouts continue without interruption through 2091. But Social Security is not, and cannot, go bankrupt, short of Congress changing how the program is funded.
Long story short, it will provide you a benefit when you retire, but that payout may not be as robust as what your parents or grandparents received.
Social Security lie No. 2: The government has stolen from Social Security, and it needs to repay every cent they took, with interest.
Another really common Social Security lie is the idea that Congress stole or borrowed from the Social Security Trust and hasn't paid the money back. As a result, the Old-Age, Survivors, and Disability Insurance (OASDI) Trust is now in deep trouble.
As believable as this myth might appear, it's entirely false. Rather than letting what currently amounts to nearly $2.9 trillion in excess cash lie around and lose purchasing power to the rising price of goods and services (i.e., inflation), the program primarily invests its asset reserves in special-issue government bonds and, to a lesser extent, certificates of indebtedness. These assets are earning approximately 2.9% annually, which in 2016 helped the program generate $88.4 billion in income. In other words, the federal government is already paying interest to Social Security.
Image source: Getty Images.
What often confuses the public is the idea that the federal government is paying its bills with the money used to purchase these special-issue bonds. The thing is, the federal government sells debt all the time to fund general expenses, and not just to the Social Security program. These special-issue bonds are backed by the full faith of the U.S. government, and at no point has the federal government failed to make an interest payment owed to Social Security's Trust. Likewise, when these bonds have matured, the federal government has always repaid what was owed. The federal government hasn't raided or stolen anything from Social Security, and every dime that should be in the OASDI is accounted for.
If there is something to be concerned about, it's the United States' growing national debt levels. About the only worry for Social Security's special-issue bonds is if debt levels rise so high that the federal government can't make its interest payments. However, with the program facing a complete excess cash exhaustion in just 16 years' time, this seems extremely unlikely to happen.
Social Security lie No. 3: The government needs to stop giving Social Security benefits to noncitizens.
A third misconception that just won't die is the belief that undocumented immigrants have been able to claim Social Security benefits, and that they are draining the program's resources.
If anything, this myth has things completely backwards. Though not all noncitizens in this country are working within legal channels -- i.e., paying federal and/or state tax -- quite a few are. In 2010, according to data highlighted by AARP, undocumented immigrants' wage income netted Social Security approximately $12 billion in payroll taxes. Yet, the program's rules are crystal clear: noncitizens aren't able to receive Social Security benefits. Thus, numerous undocumented immigrants are likely paying into a Social Security program that'll never supply them with a red cent in benefits.
Image source: Getty Images.
AARP also notes that this lie may have arisen from Americans conflating Social Security's OASDI Trust and Supplemental Security Income (SSI), which provides supplemental income to the disabled, blind, and those ages 65 and over. Though the SSI program is overseen by the Social Security Administration, the two programs are funded differently, with Social Security's OASDI being funded by the three mechanisms discussed above, and SSI funding coming from the federal government's general fund. Noncitizens who are refugees, asylum seekers, and those lawfully admitted for permanent residence, are eligible for SSI. But this in no way means that undocumented immigrants are draining the Social Security Trust.
Ultimately, it's time these three Social Security lies were put to bed for good.