4 Things You Must Do If You’re a Retiree Living in a State That Taxes Social Security Benefits

As Social Security plays such an important role in the financial well-being of America’s seniors, it might make sense that it’s exempt from taxation. And to some degree, Social Security is nontaxable at the federal level.

However, if you earn more than even a modest amount of income, between 50% and 85% of what you receive can be federally taxable. But that’s not all. You may have to pay state tax on your Social Security benefits as well. Fortunately, the states are not as onerous as the federal government — only nine currently tax Social Security payments.

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But if you do live in one of the states that does — we’re looking at you, Colorado, Connecticut, Minnesota, Montana, New Mexico, Rhode Island, Utah, Vermont and West Virginia — here’s what you’ll need to do as a retiree to minimize the effects.

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Know the Rules

Every state has different taxation laws regarding Social Security, and you can’t play the game correctly until you know the rules. In some states, Social Security taxation is unavoidable. However, in others, various limits or exemptions may come into play, and they can sometimes get confusing.

Colorado, for example, imposes a flat 4.4% tax on all income. However, the state also allows taxpayers 65 and up to deduct their Social Security income. Those from 55 to 64 can deduct up to $20,000 in retirement income.

In Connecticut, there are no state taxes on Social Security benefits for joint filers with an adjusted gross income (AGI) below $100,000 or single filers with an AGI below $75,000.

Most of the remaining seven states that tax Social Security have similar types of AGI deductions based on filing status. However, you should check with your individual state’s taxing authority to determine the specifics for your situation.

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Understand Provisional Income

The IRS uses something known as “provisional income” to determine how much of your Social Security is taxable on a federal level. Many states follow suit.

Provisional income includes most of your “ordinary income,” such as your wages or salary, pension, and investment income, and adds in your tax-free interest and half of your Social Security benefit.

So if you have a large amount of tax-free bond income, for example, the amount of your Social Security that is taxable might be higher than you imagine.

Control Your Retirement Plan Withdrawals

You already know how much Social Security you’re going to earn in a given year, and you can’t do much to change that income. But once you know the taxation thresholds in your state, you can make strategic retirement plan withdrawals to minimize or even eliminate the tax you pay on Social Security.

Of course, in some situations, you may be forced to take required minimum withdrawals from your retirement plans. But if you’re not yet at that point, try to manage your distributions to keep your overall income below the Social Security taxation threshold. Remember that qualifying withdrawals from a Roth IRA are tax-free, and Roths never require a minimum distribution. Use your Roth advantageously, if you have one, to balance out your taxable and tax-free withdrawals.

Consider Relocation

In most cases, it won’t make much sense just to avoid taxation on your Social Security benefits. As most states have exemptions from taxation for moderate-income Americans, many won’t pay any state tax on their benefits anyway.

However, if you’re in a very high tax bracket — or if you were considering relocating for retirement anyway — you may be able to save a few hundred or thousand dollars in taxation on your benefits.

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This article originally appeared on GOBankingRates.com: 4 Things You Must Do If You’re a Retiree Living in a State That Taxes Social Security Benefits