Thursday, May 19, 2022

What States Do Not Tax Your Pension Or Social Security

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Estate And Inheritance Taxes

How Your State Taxes Social Security – Probably Not At All

Another type of tax that is of particular importance to retirees is the estate tax. In recent years, legislatures across the U.S. have either repealed their state estate taxes or have increased the local estate tax exemption. For reference, the estate tax exemption is the limit below which estates do not owe taxes.

The federal estate tax exemption has increased over the years to $11.58 million in 2020 and $11.7 million in 2021. Of the 12 states that have their own estate tax, seven have an exemption of $4 million or less. Massachusetts and Oregon have the lowest exemption at $1 million.

Similar to the estate tax, an inheritance tax affects property that’s passed on to loved ones. The tax applies not to the estate itself, but to the recipients of the property from that estate. For example, if you receive $1,000 as an inheritance and are subject to a 10% inheritance tax, you would pay $100 back in taxes.

Six states have an inheritance tax. Of these, one state also has an estate tax. Inheritance taxes typically provide exemptions or lower rates for direct family members, while fully taxing non-relatives.

Paying Taxes On Social Security

You should get a Social Security Benefit Statement each January detailing the benefits that you received during the previous tax year. You can use it to determine whether you owe federal income tax on your benefits. The information is available online if you enroll on the Social Security website.

If you owe taxes on your Social Security benefits, you can make quarterly estimated tax payments to the IRS or have federal taxes withheld from your payouts before you receive them.

What Distributions Do Not Qualify For A Subtraction

Certain distributions reported on form 1099-R are not retirement or pension benefits. Under Michigan law, deferred compensation is taxable. These distributions include:

  • All distributions from 457 plans
  • Distributions from 401 or 403 plans sourced to employee contributions and the earnings from those contributions if they were not matched by the employer.
  • Early distributions under the terms of the retirement plan are always taxable regardless of the date of birth of the taxpayer.

NOTE: When considering your pension subtraction, ‘surviving spouse’ means the deceased spouse died prior to the current tax year . Deceased spouse benefits do not include benefits from a spouse who died in 2020. If you or your spouse received pension benefits from a deceased spouse, see Form 4884, Michigan Pension Schedule instructions.

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What Is The New Jersey Homestead Exemption

The New Jersey homestead rebate is a property tax benefit available to New Jersey homeowners who are at least 65 years old. The rebate is based on your income and the property taxes you have paid in prior years. For example, the rebate paid to seniors in 2019 is based on 2017 gross income and 2006 property taxes. The program was frozen in May 2020 in the midst of the COVID-19 pandemic and then restored in Oct. 2020. The 2021 property tax credits are based on income and property taxes paid for tax year 2017.

If your 2017 New Jersey gross income was $100,000 or less, the benefit is equal to 10% of your 2006 property taxes up to a maximum of $10,000. If your 2017 New Jersey gross income was between $100,000 and $150,000, the benefit is equal to 5% of your 2006 property taxes up to $10,000. Homeowners with 2017 gross income above $150,000 are ineligible for this program.

The 8th And 9th States That Charge No Tax On Retirement Income

States That Tax Social Security Benefits

As noted above, there are two other states which would fit into a gray area regarding taxes. Both Tennessee and New Hampshire do not charge any tax on income, except dividend and interest income earned through investments. However, Tennessee will be reducing its five-percent tax on dividend income by one percent annually beginning this year, meaning it will no longer charge as of 2022.

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Retirees In The South Get A Free Pass With Social Security Except In One State

All but one of the 16 states of the South are tax-friendly when it comes to Social Security. Florida, Tennessee, and Texas don’t charge state income taxes generally, which makes Social Security taxation largely a moot point. But most of the other states in the region Alabama, Arkansas, Delaware, Georgia, Kentucky, Louisiana, Maryland, Mississippi, North Carolina, Oklahoma, South Carolina, and Virginia also have a blanket exemption on taxing Social Security. West Virginia is the only exception it uses the federal rules to determine what gets included in state income taxes.

State Taxes On Social Security

Thirteen states tax Social Security benefits in some cases. If you live in one of those statesColorado, Connecticut, Kansas, Minnesota, Missouri, Montana, Nebraska, New Mexico, North Dakota, Rhode Island, Utah, Vermont, or West Virginiacheck with your state tax agency. As with the federal tax, how these agencies tax Social Security varies by income and other criteria.

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How High Are Property Taxes In New Jersey

New Jerseys property taxes are the highest in the U.S. The median property tax paid is $8,432. This is several times higher than the U.S. median.

Housing costs in New Jersey are generally higher than elsewhere in the country as well. For example, the median home value in Jersey is $348,800. Even with the state’s homestead rebate, property taxes in New Jersey can be onerous.

These Are The 37 States That Won’t Tax Your Social Security Benefits

13 States Without Pension or Social Security Taxes – # 5 WILL Shock You

This is the list of the 37 states that will not impose a tax on your Social Security retirement income:

  • Alabama
  • Wisconsin
  • Wyoming
  • West Virginia will soon be added to this list as well. In 2020, 35% of Social Security benefits can be excluded from taxable income on West Virginia state tax returns. In 2021, 65% of benefits will not be taxed, and in 2022, West Virginians won’t pay any tax on any of their Social Security retirement funds.

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    Keep Some Retirement Income In Roth Accounts

    Contributions to a Roth IRA or Roth 401 are made with after-tax dollars. This means that theyre not subject to taxation when the funds are withdrawn. Thus, the distributions from your Roth IRA are tax freeprovided that theyre taken after you turn age 59½ and have had the account for five or more years. The Roth payout wont affect your taxable income calculation and wont increase the tax that you owe on your Social Security benefits. Distributions taken from a traditional IRA or traditional 401 plan, on the other hand, are taxable.

    The Roth advantage makes it wise to consider a mix of regular and Roth retirement accounts well before retirement age. The blend will give you greater flexibility to manage the withdrawals from each account and minimize the taxes that you owe on your Social Security benefits. A similar effect can be achieved by managing your withdrawals from conventional savings, money market accounts, or tax-sheltered accounts.

    What If You Live In A State That Taxes Social Security Benefits

    If you live in one of the 13 states that tax Social Security benefits, you won’t necessarily owe your state government anything. Nine of these states — excluding Minnesota, North Dakota, Vermont, and West Virginia — have exemptions that can help many seniors hold on to their benefits.

    For example, Colorado doesn’t require Social Security recipients under 65 to pay taxes on their first $20,000 in benefits for the year. And recipients 65 and older don’t have to pay taxes on their first $24,000 per year. Other states have similar rules.

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    Check with your state revenue department to learn how it handles taxes on Social Security benefits it may even help you avoid taxes in some cases. If your state grants exemptions to Social Security beneficiaries who have an adjusted gross income below a certain threshold, as is the case in Connecticut, you may be able to avoid taxes by keeping your spending low or being careful about which retirement account you withdraw from. Roth withdrawals are tax-free, so taking money from these accounts if you have them can help you keep your AGI lower while still giving you the money you need.

    Avoiding state Social Security benefit taxes isn’t always possible, so understanding what your state might charge will keep you prepared at tax time, and help you estimate how much you need to budget for them.

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    States Levy Three Main Types Of Taxes: Income Tax Sales Tax And Property Tax You Should Understand All Three And The Impact They Will Have On Your Savings

    We all want our retirement savings to last as long as possible and reducing your tax bill can be a great way to stretch every dollar. One of the biggest factors that will determine your tax bill in retirement is where you live. There are significant tax differences depending on which state you retire in.

    States levy three main types of taxes: income tax, sales tax, and property tax. You will want to pay attention to all 3 before you make a decision on where to live.

    Understand Your Retirement Income

    Federal retirement income typically includes a pension, Social Security, and distributions from retirement accounts . On the federal level, all three of these income sources can be taxable. At the state level, it will vary state to state.

    Social Security. Many people I talk to are surprised to learn that Social Security benefits are taxable. And because most federal employees have a healthy pension and TSP come retirement time, many of them will have up to 85% of their benefits subject to federal taxes.

    The good news however, is that most states dont tax Social Security benefits. There are just 13 states that do: Colorado, Connecticut, Kansas, Minnesota, Missouri, Montana, Nebraska, New Mexico, North Dakota, Rhode Island, Utah, Vermont and West Virginia. Each state has their own criteria and structure for this taxation.

    The Best States for Federal Retirees

    Editor’s note: This article has been updated to better reflect some of the nuances in state tax policies.

    Take Advantage Of Breaks Where You Can Get Them

    States That Offer the Biggest Tax Relief for Retirees

    In 37 states, you don’t have to worry about state income tax on Social Security. Yet even in some of the others, there are often things you can do. For instance, New Mexico has an exemption for some retirement income that lets you shelter Social Security if you choose to use it in that way. However, many residents use the exemption to protect IRA distributions or pension income instead.

    Also, just because your benefits are taxable for federal purposes doesn’t mean that they will be even in states that tax Social Security. Many states have much higher thresholds for taxation than the IRS.

    Retirees like to hold onto as much of their Social Security as they can, and dealing with taxes is never ideal. Knowing which states tax Social Security at the local level means you can take that into consideration in planning where you want to spend your retirement.

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    Are Other Forms Of Retirement Income Taxable In New Jersey

    Yes, they are, but New Jersey provides a large deduction on retirement income for persons age 62 and older. Anyone at that age level with a federal adjusted gross income of $150,000 or less can deduct up to $75,000 , $100,000 or $50,000 in income from public or private pensions or retirement accounts, like a 401 or IRA. Those with an AGI between $100,001 and $150,000 can exclude up to a percentage. Pension exclusions for income between $100,001 and $125,000 are 37.5% , 50% and 25% . And for filers between $125,001 and $150,000, percentages are 25% , 18.75% and 12.5% .

    Retirement Account And Pension Income

    The way a state handles retirement account and pension income can have a huge impact on the finances of a retiree. Many states do not provide any kind of deduction, exemption or credit on withdrawals from a retirement account such as a 401 or IRA.

    How might that affect a typical retiree? Lets say your effective state tax rate in one of these states is 4% and your annual income from your 401 is $30,000. That would add up to taxes of $1,200 on that retirement account income taxes that you wouldnt have to pay in states like Alaska and Mississippi .

    Exemptions for pension income are more common. Only nine states fully tax income from a government pension, while 16 tax income from a private employer pension. The other states either exempt that income or provide a deduction or credit against it.

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    The Increase In The Social Security Cost

    Seniors will get a significant bump in their Social Security benefits in 2022.

    The Social Security Administration announced on Wednesday that the cost-of-living adjustment will be 5.9% for next year. The increase was driven by large jumps in all sorts of energy prices: gasoline, natural gas and electricity. Prices of both new and used cars and trucks surged as demand soared and computer chip shortages crimped supply. Ditto for appliances, TVs and other furniture. Restaurants and barbers raised prices as wage rates picked up in the face of shortages of workers. And finally, airfares and hotel rates began to rebound from the lows caused by the pandemic.

    This is the largest COLA increase since 1982, when benefits surged 7.4%. It is also in line with the 6% increase that The Kiplinger Letter forecast in September.

    Social Security COLAs are calculated using the Consumer Price Index for Urban Wage Earners and Clerical Workers. If prices dont increase or fall, the COLA is zero. That happened in 2010 and 2011, as the economy struggled to recover from the Great Recession, and again in 2016, when plummeting oil prices wiped out the COLA for that year. In 2021, the COLA increased payouts by 1.3%.

    Taxes In Retirement: How All 50 States Tax Retirees

    Where do expat retirees living off a pension or social security pay tax?
    • Alabama. Our Ranking: Tax-friendly. State Income Tax Range: 2% 5% .
    • Alaska. Our Ranking: Mixed. State Income Tax Range: None. Average Combined State and Local Sales Tax Rate: 1.76%. Median Property Tax Rate: $1,182 per $100,000 of assessed home value.
    • Arizona. Our Ranking: Most tax-friendly. State Income Tax Range: 2.59% 4.5% .
    • Arkansas. Our Ranking: Most tax-friendly. State Income Tax Range: 2% , 0.75% , or 2% 3.4% , 5.9% , or 5.9% .
    • California. Our Ranking: Tax-friendly. State Income Tax Range: 1% 13.3% .
    • Colorado. Our Ranking: Most tax-friendly. State Income Tax Range: Flat 4.55% Average Combined State and Local Sales Tax Rate: 7.72%. Median Property Tax Rate: $494 per $100,000 of assessed home value.

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    Recipients Born Before 1:

    For 2020 you may subtract all qualifying retirement and pension benefits received from public sources, and may subtract private retirement and pension benefits up to $53,759 if single or married filing separately or up to $107,517 if married filing jointly. Private subtraction limits must be reduced by public benefits subtracted. Withholding will only be necessary on taxable pension payments that exceed the pension limits stated above for recipient born before 1946.

    • Complete Form 4884, Michigan Pension Schedule.
    • Military pensions, Michigan National Guard pensions and Railroad Retirement benefits are entered on Schedule 1, line 11. These continue to be exempt from tax. They must be reported on Schedule W Table 2, even if no Michigan tax was withheld.
    • Social Security benefits included in your adjusted gross income are entered on Schedule 1, line 14 and are exempt from tax.
    • Public pensions can include benefits received from the federal civil service, State of Michigan public retirement systems and political subdivisions of Michigan.
    • Rollovers not included in the Federal Adjusted Gross Income will not be taxed in Michigan.
    • Subtraction for dividends, interest, and capital gains is limited to $11,983 for single filers and $23,966 for joint filers, less any subtractions for retirement benefits including US military, Michigan National Guard, and railroad retirement benefits.

    States That Do Not Tax Social Security Income

    Part of your retirement income may be coming from social security, specifically the kind for retirees. From each paycheck you received when working, a small percentage of your income went into a trust fund. The amount that is paid out will depend on an individuals earnings over the lifetime, the age at which the benefits begin to be paid out, and whether the individuals spouse is eligible for benefits.

    Even though the government is giving you this money, there are some states that will charge a tax on the payout:

    • Alabama

    Here is a breakdown of the exemptions offered by each state.

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    States With Other Exemptions

    Of states with income tax, Connecticut, Hawaii, Kansas, Louisiana, Massachusetts, Michigan, Minnesota, Mississippi. New Jersey, New York, Ohio, Pennsylvania and Wisconsin do not tax military pensions. Other states limit taxes on military pensions, but have some restrictions: Kentucky, Missouri, North Carolina and Oregon. Arizona, Oklahoma, Idaho and the District of Columbia offer some tax breaks for in-state pensions.

    States Without Pension Or Social Security Taxes

    Teacher

    Reduce your retirement tax bills.

    Retirees can help their savings last longer by moving to a place with lower taxes. These 13 states don’t tax Social Security or pension income. However, they have very different property and sales tax rates, which should also be taken into consideration, according to data from Wolters Kluwer Tax & Accounting, the Tax Foundation and the U.S. Census Bureau. Check out these low tax places to retire.

    Alabama

    The state of Alabama doesn’t tax Social Security benefits or traditional pension payments. Property owners in Alabama paid a median of just $558 in real estate taxes in 2017. The state sales tax rate is also a relatively low 4 percent, but there may be additional local sales taxes in some areas of the state.

    Alaska

    Alaska is the only state with no state income tax and no state sales tax. However, property taxes can be high. Homeowners paid a median of $3,117 for real estate taxes in 2017.

    Florida

    Year-round warm weather isn’t the only perk of retirement in Florida. The state doesn’t levy an income tax. Real estate taxes were a median of $1,752 across the state in 2017. The state sales tax rate is 6 percent.

    Illinois

    Mississippi

    Pension and annuity payments and income from Keogh plans and IRAs are generally exempt from state tax in Mississippi, and income from Social Security is also not subject to taxation. Median real estate taxes were just $879 in 2017. However, Mississippi has a relatively high state sales tax rate of 7 percent.

    Nevada

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