Frequently Asked Questions About Retirement Taxes
Navigating taxes in retirement can bring up a lot of questions. Here are a few common ones.
How does moving affect my Social Security taxes?
This is a two-part answer. At the federal level, whether your Social Security benefits are taxed depends on your “provisional income.” The Internal Revenue Service (IRS) has specific formulas for this, and your location doesn’t change it. However, at the state level, moving makes all the difference. Most states do not tax Social Security benefits, but about ten currently do. Moving from a state that taxes them to one that doesn’t can provide an immediate income boost.
If you find you owe federal tax on your benefits, you can ask the SSA to withhold taxes from your monthly payment by filling out a Form W-4V. For example, if you expect to owe $1,200 in federal tax on your benefits for the year, you could request to have $100 withheld each month to avoid a surprise bill.
What if I have an annuity? How is that taxed?
An annuity is a contract with an insurance company that can provide a guaranteed stream of income. How it’s taxed depends on the type of annuity. For a non-qualified annuity (one purchased with after-tax money), a portion of each payment is considered a tax-free return of your principal, and the other portion is taxable earnings. States that exempt retirement income often include income from annuities in that exemption, but you must check the specific state’s rules.
I plan to work part-time. How does that change things?
Working part-time in retirement can be a great way to stay active and supplement your income. However, it makes state income tax rules much more important. A state like Pennsylvania, which exempts retirement income, will still tax your wages from a part-time job. A no-income-tax state like Florida or Nevada becomes even more attractive in this scenario, as both your retirement distributions and your work wages would be free from state income tax.
Is a “low-tax” state always a “low-cost” state?
This is a critical distinction: absolutely not. Taxes are just one piece of the cost-of-living puzzle. Some no-income-tax states have very high housing costs, insurance premiums, or utility bills that can easily erase any tax savings. Always research the total cost of living—not just the tax burden—before making a move. The Consumer Financial Protection Bureau offers great resources for creating a comprehensive retirement budget.
