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does california tax social security benefits

does california tax social security benefits

does california tax social security benefits

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Overview of California Retirement Tax Friendliness

California fully taxes income from retirement accounts and pensions at some of the highest state income tax rates in the country. Social Security retirement benefits are exempt, but California has some of the highest sales taxes in the U.S.

does california tax social security benefits
does california tax social security benefits

California Retirement Taxes

In some ways, the Golden State is a perfect place for a happy retirement. It has miles of beautiful coastline and sandy beaches. The weather is sunny and mild. Northern California has the country’s best wine region and mountain ranges such as the Sierra Nevada provide great opportunities for recreation.

As many reasons as there are in favor of a California retirement however, there may be just as many against it. For starters, it has a cost of living that is far higher than the national average.

And then there are the taxes. While California exempts Social Security retirement benefits from taxation, all other forms of retirement income are subject to the state’s income tax rates, which range from 1% to 13.3%. Additionally, California has some of the highest sales taxes in the U.S.

A financial advisor in California can help you plan for retirement and other financial goals. Financial advisors can also help with investing and financial plans, including taxes, homeownership, insurance and estate planning, to make sure you are preparing for the future.

Is California tax-friendly for retirees?

Income from retirement accounts and pensions are fully taxed at some of the highest state income tax rates in the country. Social Security retirement benefits are exempt, although given the state’s high cost of living, it will be difficult for most seniors to afford to live in California on only Social Security income.

California also has high sales taxes, with an average state and local combined rate of 8.68%. That’s one of the highest in the U.S.

Is Social Security taxable in California?

Social Security retirement benefits are not taxed at the state level in California. Keep in mind, however, that if you have income from sources besides Social Security, you may need to pay federal taxes on your Social Security income.

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Are other forms of retirement income taxable in California?

Retirement account income, including withdrawals from a 401(k) or IRA, is considered taxable income in California. So is all pension income, whether from a government pension or a private employer pension.

California offers a senior income tax exemption in addition to its personal exemption. More specifically, seniors receive an extra benefit that allows them to double the standard exemption.

For the 2020 tax year, California increased the personal exemptions for all filing statuses. For singles and married people filing separately, the exemption jumped from $122 to $124, whereas married people filing jointly and surviving spouses saw their exemption increase to $248 from $244. So if you’re over 65 years of age, you can double your exemption to either $248 or $496, depending on your filing status.

does california tax social security benefits
does california tax social security benefits

What is the California homeowners’ exemption?

Owner-occupied homes in California are eligible to receive the homeowners’ exemption. It reduces taxable value by $7,000. That saves homeowners at least $70 per year, although for many homeowners the savings will be even greater.

In 2016, the state controller reinstated the Property Tax Postponement Program. This allows homeowners who are seniors, are blind or have a disability to defer their property taxes. This is only available for taxes on a primary residence. You also need to have at least 40% equity in the home and an annual household income of $35,500 or less.

California has the highest state sales tax rate in the country at 7.25%. That is the minimum you will pay anywhere in the state, but local taxes as high as 3.25% mean you will likely pay an even higher rate. Overall, the average rate you can expect to pay in California is 8.68%.

The good news is that not all goods are taxable. In fact, a number of exemptions are designed specifically to benefit seniors and retirees. That includes an exemption for prescription drugs and an exemption for most types of groceries.

What other California taxes should I be concerned about?

If you have investments that you are planning to sell during retirement, it’s important to be aware of the California capital gains tax. Any capital gains in California, including long-term capital gains, are taxed as ordinary income at the tax rates shown in the bracket table above.

How to Avoid Paying Taxes on Social Security Income

Is Social Security taxable? For most Americans, it is. That is, a majority of those who receive Social Security benefits pay income tax on up to half or even 85% of that money because their combined income from Social Security and other sources pushes them above the very low thresholds for taxes to kick in.

KEY TAKEAWAYS

  • Up to 50% of Social Security income is taxable for individuals with a total gross income including Social Security of at least $25,000, or couples filing jointly with a combined gross income of at least $32,000.
  • Up to 85% of Social Security benefits are taxable for an individual with a combined gross income of at least $34,000, or a couple filing jointly with a combined gross income of at least $44,000.
  • Retirees who have little income other than Social Security won’t be taxed on their benefits. In fact, you may not even have to file a return.
  • Your focus should be on paying less overall taxes on your combined income.
  • A tax-advantaged retirement account like a Roth IRA can help.

How Much of Your Social Security Income Is Taxable?

Social Security payments have been subject to taxation above certain income limits since 1983.1 No inflation adjustments have been made to those limits since then, so most people who receive Social Security benefits and have other sources of income pay some taxes on the benefits.

No taxpayer, regardless of income, has all of their Social Security benefits taxed. The top-level is 85% of the total benefit.2 Here’s how the Internal Revenue Service (IRS) calculates how much is taxable:

  • The calculation begins with your adjusted gross income from Social Security and all other sources. That may include wages, self-employed earnings, interest, dividends, required minimum distributions from qualified retirement accounts, and any other taxable income.
  • Then, any tax-exempt interest is added. (No, it isn’t taxed, but it goes into the calculation.)
  • If that total exceeds the minimum taxable levels, at least half of your Social Security benefits will be considered taxable income. You then have to take the standard deduction or itemize deductions in order to arrive at your net income.2

The amount you owe depends on precisely where that number lands in the federal income tax tables.

Combined income = your adjusted gross income + nontaxable interest + half of your Social Security benefits

does california tax social security benefits
does california tax social security benefits

Individual Tax Rates

Benefits will be subject to tax if you file a federal tax return as an individual and your combined gross income from all sources is as follows:

  • Between $25,000 and $34,000: You may have to pay income tax on up to 50% of your benefits.
  • More than $34,000: Up to 85% of your benefits may be taxable.2

The IRS has a worksheet that can be used to calculate your total income taxes due if you receive Social Security benefits. When you complete this typically long-winded exercise in arithmetic, you will find that your taxable income has increased by up to 50% of the amount you received from Social Security If your gross income exceeds $25,000 for an individual or $32,000 for a couple. The percentage taxed rises to 85% of your Social Security payment if your combined income exceeds $34,000 for an individual or $44,000 for a couple.2

For example, say you were an individual taxpayer who received the average amount of Social Security, $16,000, in 2020. You had $20,000 in “other” income. Add the two together and you have a gross income of $36,000, or a combined income of $28,000 (gross income + half the Social Security benefits). That’s within the $25,000 to $34,000 range for 50% of benefits being taxed, so half of your Social Security, or $8,000, is considered taxable income.

Your net income will be based on half of your Social Security income ($8,000) plus all of your other income ($20,000), minus the standard deduction or your itemized deductions. (Of course, it can get more complicated for some taxpayers, but we’ll keep this example simple.)

Married Tax Rates

For couples who file a joint return, your benefits will be taxable if you and your spouse have a combined income as follows:

  • Between $32,000 and $44,000: You may have to pay income tax on up to 50% of your benefits.
  • More than $44,000: Up to 85% of your benefits may be taxable.2

For example, say you are a semi-retired couple filing jointly and have a combined Social Security benefit of $26,000, in 2020. You had $30,000 in “other” income. Add the two together and you have a gross income of $56,000, or a $43,000 in combined income (gross income plus half your Social Security benefits). This combined income falls in the $32,000 to $44,000 range, meaning half of your benefits, or $13,000, will be taxable.

Your taxable net income will be based on half of your Social Security income ($13,000) plus all of your other income ($30,000), minus the standard deduction or your itemized deductions.

Social Security Benefits Tax Tool

This being the IRS, the straightforward example above may not apply to you. This Interactive Tax Assistant will lead you through the various complications that are possible and calculate what part of your income is taxable.

does california tax social security benefits
does california tax social security benefits

Are Spousal, Survivor, Disability, and SSI Benefits Taxable?

These programs all follow the same general rules as the Social Security program for retirees, with one exception: Supplemental Security Income, or SSI for short, is not a Social Security program. It’s a separate program for people who are disabled, and payments from it are not taxable.

Spousal Benefits

The rules for the spousal benefit are the same as for all other Social Security recipients. If your income is above $25,000, you will owe taxes on up to 50% of the benefit amount. The percentage rises to 85% if your income is above $34,000.

Survivor Benefits

Survivor benefits paid to children are rarely taxed because few children have other income that reaches the taxable ranges. The parents or guardians who receive the benefits on behalf of the children do not have to report the benefits as income.

Disability Benefits

Social Security disability benefits follow the same rules on taxation as the Social Security retiree program. That is, benefits are taxable if the recipient’s gross income is above a certain level. The current threshold is $25,000 for an individual and $32,000 for a couple filing jointly.

does california tax social security benefits
does california tax social security benefits

SSI Benefits

Supplemental Security Income (SSI) is not Social Security but a needs-based program for people who are age 65 and older, disabled, or blind.6 SSI benefits are not taxable.

Paying Taxes on Social Security

You should get a Social Security Benefit Statement (Form SSA-1099) each January, detailing the benefits you received during the previous tax year. You can use it to determine whether you owe federal income tax on your benefits.7 The information is available online if you enroll on the Social Security site.

If you owe taxes on your Social Security benefits, you can make quarterly estimated tax payments to the IRS or have federal taxes withheld from your payouts before you receive them.

State Taxes on Social Security

There are 13 states which tax Social Security benefits in some cases. If you live in one of those states—Colorado, Connecticut, Kansas, Minnesota, Missouri, Montana, Nebraska, New Mexico, North Dakota, Rhode Island, Utah, Vermont, and West Virginia—check with the state tax agency.89 As with the federal tax, how these agencies tax Social Security varies by income and other criteria.

 

 

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