When preparing for retirement, thoughtful financial planning is essential. This includes carefully considering how your Social Security benefits might be taxed depending on your state of residence. While the majority of U.S. states do not levy taxes on Social Security income, a few exceptions exist, with varying rules and thresholds.

Earlier this year, Investopedia identified 50 premier cities for retirement across the nation. This selection was based on crucial factors for retirees such as cost of living, accessibility to travel, healthcare services, and entertainment options. A significant number of these chosen cities are located in states that do not tax Social Security benefits, a key financial advantage for many retirees. Other states on the list tax these benefits only under specific circumstances. Currently, nine states have some form of taxation on Social Security benefits, often with limits tied to income levels and other criteria. For example, West Virginia is gradually phasing out taxes on Social Security benefits, with 35% deductible in 2024, increasing to 65% in 2025, and full deductibility from 2026 onwards. New Mexico allows full deductions for individuals earning up to $100,000 and joint filers up to $150,000. Montana exempts single filers earning under $25,000 and joint filers under $32,000, using a unique calculation method for higher incomes. Colorado offers full deductions for retirees aged 65 and over, while those aged 55 to 64 can deduct up to $20,000, with further changes expected in the next tax year for lower adjusted gross incomes.

Beyond Social Security, it is crucial for retirees to consider the tax implications for other retirement income sources, such as 401(k)s and pension withdrawals. States like Illinois, Iowa, Mississippi, and Pennsylvania are frequently recognized as particularly tax-friendly for retirees due to their extensive exemptions on various types of retirement income. There is also ongoing discussion among lawmakers about potentially eliminating federal taxes on Social Security benefits, a measure that could significantly impact the more than 27 million beneficiaries who currently pay federal taxes on a portion of their benefits.

Diligent financial preparation and awareness of state-specific tax laws are paramount for a secure and comfortable retirement. Understanding the nuances of Social Security and other retirement income taxation allows individuals to make informed decisions about where to reside and how to manage their finances, ultimately fostering peace of mind and financial stability in their golden years. These strategic choices contribute to a positive and fulfilling post-career life.