You may have to kiss some of your Social Security benefits goodbye in these 13 states


For retired Americans, Social Security is a vital source of income. Without it, millions of older Americans would probably find themselves struggling to make ends meet. Statistics from Gallup suggest that, for current retirees, 87% rely to at least some extent on their benefits to meet their monthly expenses.

Of course, the gray cloud hovering over Social Security is that by 2034, according to estimates from the Social Security Board of Trustees, the trust's $2.8 trillion in spare cash will have dwindled away. The report forecasts the need for an across-the-board cut in benefits of up to 21% if lawmakers on Capitol Hill are unable to find a way to narrow more than an $11 trillion budgetary shortfall. That's not a rosy forecast, considering how reliant most current retirees are, and baby boomers expect to be, on Social Security.

But a possible cut in benefits is far from the only surprise seniors may encounter when they retire and claim Social Security.

Surprise -- you'll probably owe Social Security taxes!

What working Americans and newly retired seniors may not realize is that your Social Security benefits may be taxable. The Social Security Amendments of 1983 introduced a new law that allowed the federal government to tax 50% of your Social Security benefits if, as an individual, your annual earnings topped $25,000, or more than $32,000 as a joint filer.

In 1993, further changes were signed into law that left the initial tax thresholds in place, along with the 50% proportion of benefits being exposed to taxation, but introduced a new tier of taxation. Individuals earning in excess of $34,000 annually, and joint filers making more than $44,000, could have 85% of their Social Security benefits exposed to ordinary income taxation.

The point of these taxes was to coerce additional revenue for the Social Security program out of the wealthy, who may not even need their Social Security benefits to begin with. In 2015, the taxation of benefits generated 3.4% of the $920.2 billion in revenue for the program.

Yet here's the twist. In 1983, when the amendments were first passed, roughly one in 10 retiree households was earning in excess of the tax thresholds. By the time the 1993 amendments were passed, this figure was nearing 20%. According to estimates from The Senior Citizens League, 56% of seniors wound up paying at least some federal tax on their Social Security benefits in 2015. Why, you ask? Because Congress has never updated the minimum tax thresholds to account for inflation. This means a majority of seniors will owe tax on their Social Security benefits when they retire, assuming lawmakers don't adjust these thresholds.

These 13 states will tax you as well

And I'm sorry to say that things could be even more complicated depending on where you live within the United States.

In addition to the possible federal taxation of Social Security income, 13 states also tax Social Security income to a varying degree. This means the state you choose to retire in could have a materially adverse impact on how much of your Social Security benefits you get to keep.

The states that'll potentially cause you to fork over some of your Social Security benefits are:

If there is a silver lining here, it's that some of these states have adjusted gross income (AGI) thresholds that are so high they exclude most retirees from being taxed. For instance, Rhode Island exempts single filers and couples with AGIs under $80,000 and $100,000, respectively. Similarly, Missouri ($85,000 in AGI for individuals; $100,000 in AGI for couples) and Kansas ($75,000 in AGI for individuals) have generous exemption levels.

Yet for every silver lining there's a potentially dark cloud. Four states -- West Virginia, Minnesota, Vermont, and North Dakota – could arguably be described as the least friendly to Social Security retirees. These four states have no income exemptions and mirror the federal tax schedule for Social Security.

Now here's the good news: 37 states leave your Social Security benefits alone, meaning the only taxation you'll have to be concerned with is from the federal government. Nonetheless, with the federal government having not adjusted the taxation thresholds for 34 years and looking unlikely to do so anytime soon under President Trump, it's becoming increasingly probable that you'll owe at least some tax to the federal government and/or the state you live in once you retire.

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