People across the U.S. rely on Social Security to help them make ends meet in retirement. It's therefore somewhat shocking for many to learn that tax authorities often end up including a portion of Social Security benefits in taxable income, adding to prospective tax bills.
It doesn't even take that much income to trigger taxes on Social Security at the federal level. Add up your non-Social Security income and half of your Social Security benefits, and those with combined income above $25,000 for singles or $32,000 for joint filers could pay tax on up to half of their Social Security. Above $34,000 for singles or $44,000 for joint filers, the portion that's subject to tax jumps to as much as 85%.
As if that weren't bad enough news, a handful of states also impose state income taxes on Social Security benefits in some circumstances. The good news, though, is that now that 2024 has begun, residents in a pair of states that were among those who got taxed on their Social Security can breathe a sigh of relief. Here's why Nebraska and Missouri residents no longer have to worry about losing some of their monthly Social Security checks to taxes.
Putting an early end to tax on Social Security in Nebraska
It's been a long, hard road for Nebraskans trying to eliminate the tax on Social Security. But after nearly three years of efforts, the payoff has finally come for taxpayers in the Cornhusker State.
Lawmakers in Lincoln passed Legislative Bill 64 in 2021. This legislation started the clock on a 10-year phase-out of the state income taxes on Social Security income. As initially implemented, the law would have exempted a percentage of Social Security income otherwise subject to tax, with that proportion rising by 10 percentage points per year. By 2030, the tax would have been phased out entirely.
That wasn't fast enough for opponents of Social Security taxation, and in 2022, another new bill made it before the legislature. Legislative Bill 873 doubled the pace of the phase-out, establishing a target date of 2025 after which taxes on Social Security would disappear.
It took one final swing to chop out the tax on Social Security entirely in Nebraska. In 2023, Legislative Bill 754 included a provision that accelerated full tax-free status for Social Security by a year. When Governor Jim Pillen signed that bill into law, it set the final countdown that led to roughly 350,000 Nebraskans never having to worry about whether their Social Security benefits would get taxed.
The Show-Me State shows retirees some tax relief
Unlike Nebraska, which used the federal rules for governing how much Social Security to include in taxable income, Missouri has always been less strict when it comes to taxing benefits. Single filers with incomes of $85,000 or less didn't have to worry about paying taxes on Social Security, nor did joint filers making $100,000 or less.
Yet given the desire to get rid of an unpopular tax, lawmakers in Springfield passed Senate Bill 190. The signature of Governor Mike Parson early this past summer made the full exemption on Social Security benefits available to everyone, no matter how much or how little income they made. Those provisions took effect on New Year's Day, and residents will see the results when they file their 2024 tax returns in early 2025.
Is more relief ahead?
There are still a handful of states that impose income taxes on Social Security. However, with the prevailing trend toward state legislatures looking for ways to get rid of these unpopular taxes, it could be just a matter of time before more states join Nebraska and Missouri in freeing up their retirees from losing any more of their hard-earned Social Security benefits.
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These 2 States Just Stopped Taxing Social Security in 2024 was originally published by The Motley Fool