For many American workers, Social Security is their only means of support when they retire. You contribute to the Social Security pension plan through payroll taxes placed on you and your employer. When you reach retirement age, which is set by Congress and can change with the passage of a law, you can collect your benefits. Benefits are subject to federal taxes. States have the option of taxing your benefits, and some choose not to.
IRS Taxation Regulations
If your state taxes your Social Security income, it must do so in accordance with IRS regulations. Even if you live in a state that taxes Social Security, your benefits may be exempt from the tax depending on the benefit amount received in the tax year. Generally, 50 percent of your benefits are taxable plus any other taxable income you receive unless the combined total is less than the base amount for your filing status, in which case your benefits are not taxable. The 2011 base amounts are: single, head of household, widow(er), married filing separately and lived apart from spouse for 2010 tax year, $25,000; married filing jointly, $32,000; married filing separately and lived with your spouse through 2010, $0. If the total of one-half of your Social Security income and all your other income is more than $34,000 ($44,000 if married and filing jointly), or you are married filing separately and lived with your spouse in the tax year, up to 85 percent of your benefits may be taxable. States must honor these guidelines.
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No State Social Security Tax
Nine states in the Union do not have income tax at all or tax only certain unearned income. In these states your Social Security benefits are taxed only by the federal government: Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington and Wyoming. Twenty-eight states have an income tax, but as of 2011 exempt Social Security benefits from taxation. These states are Alabama, Arizona, Arkansas, California, Delaware, District of Columbia, Georgia, Hawaii, Idaho, Illinois, Indiana, Kentucky, Louisiana, Maine, Maryland, Massachusetts, Michigan, Mississippi, New Jersey, New York, North Carolina, Ohio, Oklahoma, Oregon, Pennsylvania, South Carolina, Virginia and Wisconsin.
Four states exempt a higher portion of your Social Security income from state taxes. Some of these states -- Connecticut, Iowa, Kansas and Missouri -- also offer tax credits for the tax you paid on your federal income taxes. Missouri and Iowa are gradually raising the income threshold for exemption from taxes, and there will be no tax on your benefits in Missouri by 2012 and in Iowa by 2014.
Three states -- Colorado, Utah and West Virginia -- offer a general retirement income exclusion or credit. These exclusions and credits may result in a taxation exclusion for part or all of your Social Security income. Utah, for example, offers a nonrefundable tax credit of up to an amount based on filing status if you meet the age criteria and the income limits. If you are over the income limits, the credit is reduced by 2.5 percent as your income level increases.