Retirement planning is a huge step in anyone’s life, and it can feel overwhelming at times. For many, Social Security benefits are a key part of their retirement income. But what happens if the state you live in taxes these benefits? In this article, we’ll take a look at the experience of Helen Y., a retiree from Colorado, and how the state’s taxation of Social Security benefits affected her retirement savings. You’ll also learn important tips on how to navigate these taxes to make the most of your retirement.
States that Tax Social Security
While Social Security benefits are generally not taxed by the federal government, some states do tax them. This can be a surprise for many retirees, especially those who are not familiar with state-specific tax laws. Helen Y., a 73-year-old retiree from Colorado, was shocked when she discovered that Colorado taxes Social Security benefits.
Tax Exemptions in Some States
There are some exceptions to this rule. For example, in Colorado, retirees who are 65 or older can deduct their Social Security benefits from their state income tax. However, this rule only recently changed, and for those like Helen, who retired before the law changed, part of her Social Security benefits were still taxed. States that tax Social Security include Colorado, Connecticut, Nebraska, and others, but the specific rules vary depending on your age, income level, and other factors.
Helen’s Experience with Social Security Taxation
Helen, a former creative director, had been saving for retirement for decades. She knew about the federal taxes on Social Security, but she wasn’t aware that Colorado taxed these benefits. She describes it as a startling realisation.
For retirees in Colorado, anyone under 65 continues to face taxes on their Social Security benefits. Helen was 67 when she retired, so she had to pay state taxes on a portion of her Social Security. This wasn’t a huge amount, but it was still a challenge for someone living on a fixed income. Helen had to make some adjustments to her savings and budgeting to account for this unexpected tax burden.
Adjusting to the Tax Impact
After discovering the tax on her Social Security benefits, Helen had to rethink her retirement savings strategy. Here are the key steps she took to adapt:
Working an Extra Year
One of the first things Helen did was work an extra year. Although she didn’t want to, it allowed her to save more money and give her extra funds to play around with. This helped her cope with the added tax burden on her Social Security benefits.
Diversifying Income Streams
Helen also worked on diversifying her income streams. She put more money into annuities, high-interest savings accounts, and stocks. This way, she didn’t have to rely solely on Social Security to cover her expenses. She was fortunate that her daughter had knowledge about investing and finances, which helped Helen make smart decisions.
Considering a Move
At one point, Helen thought about moving to a state where Social Security benefits aren’t taxed. New Mexico was one state on her mind. However, after considering the costs of moving and the impact it might have on her life, she decided it wasn’t worth the trouble.
The Impact on Helen’s Lifestyle
State taxes on Social Security benefits can also affect your lifestyle. For Helen, being more mindful of her spending became a reality. She had to cut back on things she enjoyed, like visiting her son in London. “It was embarrassing,” she says. “I had to ask him to buy my plane ticket for me.”
The added tax burden forced Helen to be more cautious with her spending, making her realise just how important it is to carefully plan and adjust to unexpected costs during retirement.
Getting Involved in Local Politics
Helen didn’t just sit back and accept the situation. She became involved in local politics, advocating for changes to Colorado’s tax laws. With more time on her hands during retirement, she felt it was a good way to stay engaged and make a difference. “I want to use my time for good,” she says.
Lessons Learned: Be Informed About Taxes
Helen wishes she had known about Colorado’s tax laws earlier. She admits that if she had done more research, she might have made different decisions about her retirement savings. But she also believes in the saying, “You live, you learn.” She now advises others who are approaching retirement to do their tax homework.
“You need to understand not just federal taxes, but state and local taxes too,” Helen says. “Ask your family and friends for advice—especially those who are older and have been through it.”
The impact of state taxes on Social Security benefits can be significant for retirees. In Helen’s case, she was caught off guard by Colorado’s taxation of Social Security, which led her to reassess her retirement savings and lifestyle. By working an extra year, diversifying her income sources, and adjusting her spending habits, she was able to cope with the added tax burden. The experience also made her more politically active and eager to educate others about the importance of understanding tax laws in retirement. If you’re nearing retirement, make sure to do your research on state taxes to avoid any unpleasant surprises in the future.
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