Social Security is a big part of being ready for retirement. For millions of Americans age 65 and up, it provides 40% of their monthly income.
How much money you get each month from Social Security depends on how long you worked, how much you made while you were working, and how long you claim.
Where you live also plays a role. President-elect Donald Trump has said that he will not tax benefits, but the federal government can still tax up to 85% of your checks.
But that is not all. Because state laws are different and are always changing, you may also have to pay state income taxes on your monthly income. Only nine states will tax Social Security by 2025.
This is good news for people who get it: Connecticut, Minnesota, Montana, New Mexico, Rhode Island, Utah, Vermont, and West Virginia.
Three states will stop imposing taxes on Social Security benefits this year
Around the middle of 2024, Kansas joined Missouri and Nebraska in ending tax breaks, and they will not do so again. West Virginia, on the other hand, plans to get rid of its state Social Security taxes in 2026.
But because each state has its own tax laws and deductions that people can use if they meet certain age or income requirements, each state has its own income taxes on Social Security checks.
For instance, starting in 2022, people in Colorado aged 65 and up will be able to fully deduct their federally taxed Social Security income from their state income tax returns.
After 2025, people between the ages of 55 and 64 who make less than $75,000 a year will be able to deduct all of their federally taxable Social Security income from their state taxes.
Finally, to make sure you get the most out of your Social Security benefits, it is important to know the exact rules that your state follows.
Estimated retiree savings in states without benefits taxes next year
As of 2025, 41 states in the U.S., plus Washington, will not tax cash benefits.
Brian Kuhn, a financial advisor at Wealth Enhancement Group, says that people in these states can figure out how much tax they saved on their Social Security benefits by looking at the effective tax rate they paid on all of their income.
People who get Social Security can use the effective tax rate to figure out how much money they will get in total.
Kuhn says that you would save $1,500 if you had monthly payments of $30,000 and your state’s effective rate was 5%. When everything is taken into account, retirees who get tax-free pensions can save a lot of money.
The publisher of Good Financial Cents, Jeff Rose, CFP, says that retirees in Missouri, for example, could save a total of $309 million a year.
It costs about $17 million in Nebraska. When people retire, they do not have to pay state taxes on that much money. They can keep it.
As US states try to get rid of benefits taxes, people are worried that Social Security will run out of money.
The Social Security Board of Trustees thinks that by 2035, the trust’s assets will be so low that they can only cover 76% of planned payments. This will happen unless current payables are cut by 13% or payroll tax rates are raised to 14.4%.
Retirement cuts are a major concern for millions of Americans who rely on these monthly benefits
Committee for a Responsible Federal Budget (CRFB) warned in September that a retired couple with a medium income who stop working in 2033 could lose up to $16,500 in Social Security benefits.
A single person could lose about $12,400. People in retirement usually get about 40% of their income from Social Security.
Stephen Kates, senior financial analyst at Retire Guide.com, told Newsweek that the expected 20% cut in payouts will make it much harder for many retirees to keep up with their expenses if nothing is done to fix the gaps.
According to a poll done by Newsweek in October, 56% of people were very worried about getting smaller monthly checks. People from Generation X, who are coming of age after the baby boomers, were the most worried about this issue.
53% of boomers and people born between 1928 and 1945 are very worried about their future entitlements, while only 37% of Generation Z members are less worried.
This should not be a surprise since most of them have already retired and their monthly benefits can not be cut once they start getting them.
However, neither Trump nor Harris have made Social Security a major issue, and neither has come up with a clear plan to avoid the funding cliff that is coming up.
