Does The Federal Government Tax Social Security Benefits
The federal government taxes some seniors’ Social Security benefits as well. It determines how much you owe by looking at your provisional income. That’s your AGI plus any nontaxable interest and half of your annual Social Security benefits.
Individuals with provisional incomes in excess of $25,000 and married couples with provisional incomes in excess of $32,000 could owe taxes on up to 50% of their benefits. Individuals with provisional incomes greater than $34,000 and married couples with provisional incomes greater than $44,000 could owe taxes on up to 85% of their benefits.
But that’s the worst-case scenario. Some people pay taxes on a smaller amount than this, and some manage to avoid benefit taxes entirely.
Many seniors do end up paying some Social Security benefit taxes, though. If you don’t think you can avoid taxes altogether, the next-best thing to do is to estimate how much you might owe in taxes and budget for this in your retirement plan.
If you’re not retired yet, pay attention to any rule changes related to Social Security or benefit taxation, and update your retirement plan accordingly. Keeping a close eye on these changes will ensure you aren’t caught off guard by your tax bills in retirement.
Did you know? Retirees in these 13 states play by different Social Security rules
Arizona Has A Tax Friendly Climate For Retirement
If you are thinking about retiring in the Phoenix you will be happy to discover that Arizona has a moderately friendly tax climate for retirement, even though it does have both an income and a sales tax. One reason is that Arizona has relatively low property taxes and some protections for people over 65
Reasons For Retiring In Arizona
Arizona is a popular retirement destination, with many seniors from the U.S. and Canada choosing to call it home. Similar to Florida, Arizonas senior population grows in the winter months with nearly 300,000 retirees temporarily settling in Arizona for the winter months. From the beginning, Arizona has been an expert in retirement luxury. The countrys first active adult retirement community started in Youngtown, Arizona, setting the stage for Arizona as a retirement mecca. Today, over 17% of the states population is 65 or older and boasts over 100 age-restricted communities.
From tax breaks and affordable living to award-winning golf courses, we love the Grand Canyon State because of the opportunities it affords our residents. Here are 10 reasons our residents love retiring in Arizona:
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Where Are Retirees Moving Proof Is In The Numbers
We went back five years and analyzed data to identify just how popular Arizona is as a retirement destination.
According to SmartAsset, roughly 800,000 people ages 60 and older actually moved to their top 10 retirement destinations between 2015 and 2019 . Over 18% within this group ended up in the state of Arizona, which landed in second behind Florida . For comparisons sake, the number of Arizona relocations represents more than twice as many people than those who moved to North Carolina which often landed third on their lists.
Arizonas numbersas a percentage of top-10 destinationshave remained fairly steady: 18.8% in 2015, 16.6% in 2016, 20.0% in 2017, 20.8% in 2018 and 17.5% in 2019.
Taxes On Unemployment Benefits
All benefits are considered gross income for federal income tax purposes. This includes benefits paid under the federal CARES Act, Federal Pandemic Unemployment Compensation , state Extended Benefits , Trade Adjustment Assistance , Pandemic Unemployment Assistance , Pandemic Emergency Unemployment Compensation , and Lost Wages Assistance . DES reports these benefits to the Internal Revenue Service for the calendar year in which the benefits were paid.
You may choose to have federal income tax withheld from your unemployment benefit payments at the rate of 10% of your gross weekly benefit rate , plus the allowance for dependents .
The amount deducted for state income tax will be 10% of the amount deducted for federal taxes, which is currently calculated as 1% of the gross weekly benefit amount. Please Note: State income tax cannot be withheld from the $300 additional weekly benefit in Lost Wages Assistance and the $600 additional weekly FPUC benefit for regular UI claims. Claimants who received FPUC and/or LWA in regular UI will be responsible for paying any tax due on those amounts when filing state income taxes for calendar year 2021.
After selecting your tax withholding on the initial Unemployment Insurance application, you can change your withholding preferences by completing the Voluntary Election for Federal/State Income Tax Withholding form . After completing the form, submit it to DES by mail or fax.
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When Your Social Security Benefits Will Still Be Taxed
Just because these 37 states dont enact specific taxes on Social Security, it doesnt mean you wont be taxed on Social Security by the federal government .
The Social Security Administration relies on a concept called combined income to determine how much you pay in federal taxes. Your combined income is equal to:
- Half of your total benefit amount for the tax year PLUS
- Any other retirement income
If you make less than $25,000 per year and file as an individual , your benefits will not be taxed. Up to 50% of your benefits are taxable if you make anywhere from $25,000 to $34,000 per year .
Those who have a combined income of more than $34,000 per year will be taxed on up to 85% of their benefits. If you have a combined income and you are married filing jointly, your benefits will be taxed up to 85% once you make more than $44,000 per year.
The Ultimate Winner: Florida
Florida or Arizona? It’s a tossup, but Florida comes out slightly on top, winning eight categories versus Arizona’s six.
With nearly 700 retirement communities, Florida is truly a haven for seniors. It’s helped by having no income or Social Security taxes, a higher retirement income than Arizona, a lower cost-of-living score and a stronger quality of Medicare and public safety.
On the other hand, Arizona’s 65-and-older community boasts a higher median household income, and it has a leg up in housing affordability — for both renters and owners — as well as a lower property tax rate and lower median real estate taxes. In addition, it ranks higher than Florida in hospital quality.
But the truth is that the two states scored similarly across many of these categories. While the data is helpful to know before you make any big decisions, there’s a reason why so many older Americans flock to Arizona and Florida: They’re both good choices in retirement.
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Jami Farkas contributed to the reporting for this article.
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Youll Find Plenty Of Company
Between 2010 and mid-2018, Arizonas population grew by 12.2%. In 2020, Arizona was one of the top states with the most inbound movers, according to United Van Lines. Retirement was the reason for the relocation cited by 39.6% of the Arizona newcomers.
There are 166 age-restricted retirement communities, some starting as young as 45, across the state. The most popular, according to 55places.com, a website focused on active adult communities, is Sun City in Sun City, Arizona, an age-restricted retirement community for folks 55 and older. It offers seven recreation centers, “one of the highest rates of golf holes per capita of any active adult community in the country,” indoor and outdoor swimming pools, restaurants, and fitness centers as well 30 churches, a synagogue, two libraries, a performing arts center, an on-site hospital, and more.
Only 11 States Actually Levy A Tax On Social Security Benefits
Social Security benefits are a vital source of income for many retired Americans. However, as with any income, the federal government is able to tax Social Security benefitshow much depends on the retirees income. Generally speaking, this is all that Social Security recipients in most parts of the United States will have to pay.
However, this isnt always the case. While most states dont tax Social Security, 11 states do.
Heres what to know.
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Best Places To Retire In Arizona On A Budget
Arizona is one of the most tax-friendly places in the country for retirees. Not only does it charge reasonable taxes, but the state also offers plenty of sunshine for sun worshipers.
If you opt to settle in Arizona state in retirement, it would be wise to do so in low-cost areas, especially if your retirement income is low. Some of the most budget-friendly places to retire in include:
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Is Social Security Income Taxable
According to the IRS, the best way to see if youll owe taxes on your Social Security income is to take one half of your Social Security benefits and add that amount to all your other income, including tax-exempt interest. This number is known as your combined income, and this is how its calculated:
Combined Income = Adjusted Gross Income + Nontaxable Interest + 1/2 of Social Security benefits
If your combined income is above a certain limit , you will need to pay at least some tax. The limit for 2022 is $25,000 if you are a single filer, head of household or qualifying widow or widower with a dependent child. The 2022 limit for joint filers is $32,000. However, if youre married and file separately, youll likely have to pay taxes on your Social Security income.
Are States That Tax Social Security Benefits Worse For Retirees
Including Social Security benefits in taxable income doesnt make a state a more expensive place to retire. According to the Missouri Economic Research and Information Center, as of the third quarter of 2021, while four of the states that tax Social Security benefits have notably high cost-of-living index scores, the remaining eight fell within the two lowest-scoring groups. Kansas, in particular, had the second-lowest score in the U.S., after Mississippi.
The inverse is also true, as states that dont levy a Social Security tax arent inherently tax-friendlier places to live. When a state government doesnt garner income from one potentially taxable source, it typically makes up for it with other forms of taxation.
For instance, while Texas doesnt levy a state income tax at all , it relies heavily on taxes from a variety of other sources, including insurance taxes sin taxes on mixed beverages, tobacco products, and coin-operated machines and motor fuel taxes.
Other states that dont earn revenue from Social Security incomesuch as Arkansas, California, Louisiana, and New Yorkhave some of the highest income or sales tax rates in the U.S.
Living in a state that levies fewer taxes may be good for your budget, but it can limit the local governments ability to invest in social services that you or your loved ones may rely on, such as healthcare, infrastructure, and public transportation.
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Health Care In Arizona
Arizonas health care matches up well with and exceeds much of the country. According to the U.S. News & World Report health care rankings, Arizona ranks 21st nationally in overall health care. Arizona also ranks 4th in quality of health care.
This is a major consideration for many retirees. When determining where to retire, it makes sense to identify areas with strong health care systems and service since older adults are likely to deal with health issues as they age.
But one issue for the state is that, while its quality of care is excellent, access to that care is lagging. Arizona was ranked 43rd for health care access, and the United Health Foundation found that the state had a low prevalence of cancer screenings and flu shot coverage.
Medicare quality is also an important consideration for retirees. While Original Medicare is a federal program with uniform coverage across the country, Medicare Advantage plans that many retirees opt for vary from state to state.
According to the U.S. News & World Report, Arizona ranked 24th for Medicare quality. This means that retirees in Arizona should have access to a good variety of quality Medicare Advantage plans.
Arizona State Sales Tax
Arizonas state sales tax is 5.6%, but many counties and cities can add to that. The average combined sales tax rate comes out to about 8%. Arizona as a state does not tax food for home consumption, but most cities do. Of particular interest to many retirees, Arizona does not tax drugs prescribed by a licensed physician or dentist.
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States That Don’t Tax Social Security Benefits
Many people are surprised to learn that they can end up having to pay federal income tax on their Social Security benefits. To add insult to injury, some states also require residents above a certain income threshold to pay state income tax on what they receive from Social Security. Yet the majority of states are kind enough not to tax Social Security, so it’s worth considering the issue in choosing where you want to live after you quit your job and start drawing your benefits.
Cost Of Living In Arizona
Living in Arizona isnt exactly cheap, but its not overly expensive either, especially compared to some of the other best states to retire in. According to the Missouri Economic Research and Information Center, Arizona ranked 33rd nationally for cost of living in 2021.
Comparable states for cost of living were Idaho, Pennsylvania and Virginia. A higher cost of living essentially means that your money will not go as far as it would somewhere else.
According to USA Today, the value of a dollar in Arizona is $1.04, which is right around the middle of the pack nationally.
This means you probably dont have to worry about your money having significantly less spending power in Arizona than it would where you currently live or in another retirement destination you are considering.
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Arizona Psprs And Taxes
The Arizona Public Safety Personnel Retirement System is another pension plan available for sworn public safety personnel. These include police officers, municipal firefighters and highway patrol employees. The defined benefits plan is also qualified under section 401 of the Internal Revenue Code, and it has been in existence since 1968.
For members under the PSPRS benefits plan, benefits are determined based on both their contributions and earnings from those contributions. If you are a retiree on this plan, you will receive a lifelong Arizona retirement income, which is considered taxable income.
However, if you contributed after-tax funds into the system, some of your monthly benefits may be considered nontaxable. In addition, if you receive work-related disability pension benefits, a portion of it may be nontaxable.
How Arthritis Asthma And Allergy Sufferers Fare In Arizona
For those of you considering Arizona because you suffer from arthritis, you should know that according to the Cleveland Clinic, the weather has a moderate impact on arthritisbut not as much as most think. However, the good news is that you wont get much cold, wet weather in Arizona .
The same can be said about retirees with asthma and allergies. While many different factors can trigger and affect asthma, air pollution is often a leading cause. According to the American Lung Associations 2022 State of the Air Report, Phoenix-Mesa continues to rank in the top ten most polluted cities therefore, where exactly you reside in Arizona can make a big difference.
In regards to allergies, many people choose to move closer to the desertbelieving the climate boasts fewer pollen-releasing plants. However, the opposite is actually true. Not only does plenty of Arizona fauna induce allergies, but there are also dust storms: which are especially prevalent in the Phoenix-Tucson corridor.
The best advice here is to spend some time in Arizona and take note of any associated health effects before factoring these considerations into your relocation decision.
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How To Calculate Social Security Tax
Its fairly easy to calculate your Social Security tax. You multiply your earningsup to $147,000by your Social Security tax rate, depending on whether youre an employee or are self-employed.
For example, lets say Michael works for a company and earns a salary of $150,000 in 2022. The Social Security tax applies to the first $147,000 of his wages, so his tax liability is $9,114: his $147,000 income multiplied by 6.2% .
If hes working for himself and earns the same $150,000, hell owe the full Social Security tax on his first $147,000 of income. So his liability would be $18,228: $147,000 multiplied by 12.4% . However, his tax bill may be lowered if he qualifies for the self-employment tax deduction.
What Is The Arizona Property Valuation Freeze
The property valuation freeze is a form of property tax relief available to homeowners in Arizona with total income below a certain level. It freezes a homes value for property tax purposes, which in turn limits any potential increases in annual property taxes.
For individual owners, the income level is $40,368 for 2022. For properties owned by two or more persons, the 2022 income level is $50,460. To be eligible, the property must be the owners’ primary residence and they must have lived there at least two years.
Seniors who are 70 or older may be eligible to defer payment of their property taxes on their principal residence entirely. To be eligible for deferment, they must have lived in their home for six years or in the state of Arizona for 10 years. They must also have a total taxable income of no more than $10,000. If successful, payment of the taxes won’t be due until the owner dies or sells the house.
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