Tax season is probably everyone’s least favorite time of year. But the experience can be a little more daunting for millions of Americans who receive Social Security benefits and live in a state that applies an additional tax on these payments.
To be clear, most states don’t tax Social Security payments — the federal government will already tax them, beyond a certain gross adjustment income threshold. So the vast majority of retirees don’t need to worry about this. However, Colorado, Connecticut, Vermont, Montana, Minnesota, New Mexico, Rhode Island, West Virginia and Utah will collect some portion of your benefit payments.
If you live in any of these states, here are three ways you can prepare for this and potentially reduce your liabilities.
Most states that charge an additional tax on Social Security benefits do so only above certain income thresholds.
In Connecticut, for instance, married couples filing together would pay state tax on these benefits if their joint threshold exceeds $100,000. Those filing under any other status would owe taxes only if the adjusted gross income (AGI) is above $75,000. New Mexico and Rhode Island also have thresholds at varying levels, depending on your status.
At the federal level, if you’re single and your total income is above $25,000 or if you’re married and your combined income is above $32,000, a portion of your Social Security benefits could be taxable, according to the Internal Revenue Service.
With this in mind, it’s important to keep track of all your various income sources and try to forecast future earnings as well to see if you hit any of these thresholds and so you can plan ahead.
Some states do offer exemptions, credits and offsets to lower the burden of taxes on lower- or middle-income retirees.
In Colorado, for example, residents over the age of 65 are allowed to deduct the full amount of Social Security benefits included in their federal taxable income from their state taxable income.
Read more: Are you rich enough to join the top 1%? Here’s the net worth you need to rank among America’s wealthiest — plus 2 ways to build that first-class portfolio
