Taxation of Social Security
Eligibility to collect Social Security benefits begins at age 62. Many seniors wait until a later age to collect larger benefit amounts. Whether Social Security benefits are taxable by the Internal Revenue Service (IRS) depends on how much additional income the person filing taxes receives. Some states, though not many, assess taxes on benefits.
How to Determine if Social Security Benefits Are Taxable
A senior whose only source of income is Social Security does not have to pay federal income taxes on their benefits. If he receives other sources of income, including tax-exempt interest income, they must add one-half of his annual Social Security benefits to their other income and then compare the result to a threshold set by the IRS. If the total is more than the IRS threshold, some of his Social Security benefits are taxable.
For 2020, the threshold amount is $25,000 for singles and $32,000 for married couples filing jointly. Married couples who live together but file separately have a threshold of $0 and must pay taxes on Social Security benefits regardless of other income earned.
States That Tax Social Security Benefits
Most states do not tax Social Security benefits, but 13 do under certain circumstances. The states that tax Social Security benefits are Colorado, Connecticut, Kansas, Minnesota, Missouri, Montana, Nebraska, New Mexico, North Dakota, Rhode Island, Utah, Vermont, and West Virginia. Iowa used to assess taxes on benefits until it phased the taxes out completely in 2014, while New Mexico exempts some benefits for beneficiaries age 65 and over.