OWhen planning for your retirement, chances are you’ll take your Social Security benefits into account when setting your budget. That’s why it’s crucial to have realistic expectations about the income you’ll get from your retirement checks.
However, you cannot assume that you will get the full amount of your promised benefit. This is because it is very possible that you will end up owing taxes on the money you receive, especially if you live in one of the 13 states.
Why retirees in these 13 states risk losing more benefits
Although it may come as a surprise, both the federal government and your state could end up taking part of your Social Security retirement checks and leaving you with less to live on.
While seniors across the United States should be aware that the IRS takes a cut once provisional income exceeds $25,000 for single filers or $32,000 for married joint filers, people living in the Most places in the country don’t have to worry about their state wanting a portion of their monthly payments as well. But this is not the case for the residents of these 13 localities:
- New Mexico
- North Dakota
- Rhode Island
- West Virginia
If you live in one of these states, your local government taxes Social Security benefits for at least some seniors. Generally, only high earners need worry about losing some of their money because of this. But every senior living in one of these places needs to know the rules so they are prepared for taxes to eat into their benefits.
Why is it so important to know if your Social Security benefits will be taxed?
Understanding the tax rules that apply to your Social Security checks is crucial because many retirees are on fixed incomes and every dollar counts.
Retirement benefit checks are intended to replace only a small portion of pre-retirement income. Specifically, they’re supposed to cover 40% of what you were earning, with savings and/or retirement income providing the rest of the 40% to 50% of income you’ll need to replace. Unfortunately, far too many people rely too much on Social Security or assume they can manage on their own on benefits when they really can’t. And that problem is exacerbated if you have to pay taxes on benefit checks that are already too small.
Before you retire, carefully consider how much Social Security will go, compare that amount to your monthly expenses, and make sure your savings will provide enough additional funds at a safe withdrawal rate. If you find that you won’t make it, you’re not really ready to retire or you’ll have to make big changes, like downsizing your lifestyle.
If you don’t have an accurate estimate of Social Security payments, you can assume you’ll end up with more money than is actually available. When benefit taxes reduce the amount you have left to spend, you could find yourself in a detrimental financial deficit that forces you to deplete your savings too quickly or prevent you from affording other essentials.
By learning your state’s tax rules, you can avoid this fate, either by increasing your savings rate or by moving to a place where you can keep more of your Social Security money.
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