Are you worried about having to pay federal income tax on your Social Security benefits?
Even though you pay into Social Security your whole life, the truth is, many Americans still have to pay taxes on that income once they retire.
But worry not; we’re here to help walk you through every question related to if your Social Security is taxable or not.
So, keep reading to learn everything you need to know.
What Are Social Security Benefits?
Social Security benefits include:
- Monthly retirement benefits
- Spousal benefits
- Survivor benefits
- Disability benefits
The federal government may tax these benefits each year.
But, these benefits don’t include Supplemental Security Income (SSI) payments. SSI is different from Social Security. It’s a needs-based program for people who are:
- Age 65 and older
The government doesn’t tax SSI benefits.
What the IRS Says About Taxing Social Security
The IRS may tax some of your Social Security benefits. How much it will tax depends on your income and filing status.
Generally, retirees who have little income other than Social Security won’t need to pay taxes on their benefits. Many of these retirees don’t even need to file a tax return.
Regardless of income, the maximum amount one can expect their tax rate to be on Social Security benefits is 85%.
To determine if the government will tax your benefits, you need to calculate your adjusted gross income (AGI).
Take half of the Social Security money you received during the year and add it to your other income. This includes:
- Self-employed earnings
- Tax-exempt interest (the government doesn’t tax it, but you must still add it to the calculation)
- Capital gains
- Required minimum distributions (RMDs) from qualified retirement accounts
If you’re single and your AGI is above $25,000, the government may tax some of your Social Security benefits.
If you’re married filing jointly, you need to take half of each person’s Social Security and add it together. Then, add that number to your combined income, as mentioned above.
If your combined AGI is above $32,000, the government may tax some of your Social Security benefits.
Tax on 50% Social Security Income
The government will tax some above the threshold at 50%. These people include:
- Single with an income between $25,000 and $34,000
- Filing single with an income between $25,000 and $34,000
- Head of household with an income between $25,000 and $34,000
- Qualifying widow/widower with an income between $25,000 and $34,000
- Married filing separately and lived apart from their spouse for the entire tax year with an income between $25,000 and $34,000
- Married filing jointly with an income between $32,000 and $34,000
Tax on 85% Social Security Income
The government will tax some above the threshold at 85%. These people include:
- Filing single with an income above $34,000
- Head of household with an income above $34,000
- Qualifying widow/widower with an income above $34,000
- Married filing separately and lived apart from their spouse for the entire tax year with an income above $34,000
- Married filing separately and lived with their spouse at any point in the tax year (no income limit)
- Married filing jointly with an income above $44,000
What If I Don’t Know How Much I Received in Benefits?
If you don’t know how much you received in benefits, that’s okay. Every January, the IRS sends you a Social Security Benefit Statement (Form SSA-1099) that shows the amount you received for the previous year.
You can use this form to help you calculate your income (AGI). You can also use it as you fill out your federal income tax return.
If you lose or misplace this form, you can quickly request an instant replacement using your online “my Social Security” account. Create an account now if you don’t yet have one.
Click on the “Replacement Documents” tab to get the needed forms.
How Do I Pay Taxes on my my Social Security Income?
If you owe taxes on your Social Security benefit, there are several ways of paying. One way is to make quarterly estimated tax payments to the IRS.
Another way is to have the government withhold federal taxes from your benefit checks. This is the same as when you were working, where the government withholds taxes from your paychecks.
If you want the government to withhold taxes, fill out Form W-4V (Voluntary Withholding Request) and send it to your Social Security office. You can choose to have the government withhold 7%, 10%, 12%, or 22% from your monthly payments.
Additionally, you can pay your total tax bill on Tax Day in April. However, if you choose this option, make sure you’re setting aside part of your payment each month so you don’t end up with a bill you cannot afford.
Social Security Taxes by State
Some states also tax your Social Security benefits. This means you may need to pay both federal and state taxes on your payments. The states that do not tax Social Security benefits are:
- New Hampshire
- New Jersey
- New York
- North Carolina
- South Carolina
- South Dakota
Washington D.C. also doesn’t tax Social Security benefits.
The remaining 13 states tax some or all of the benefits you receive.
The following states follow federal rules for taxing Social Security benefits:
- North Dakota
- West Virginia
And the following states partially tax Social Security benefits but have different exemptions for income and age:
- New Mexico
- Rhode Island
If you live in a state that taxes Social Security benefits, it’s best to look up your state’s specific laws to know how much tax you may be responsible for.
Is There a Way To Reduce Social Security Taxes?
The best way to avoid paying taxes on your Social Security benefits is to keep your federal AGI below the threshold. But, of course, this isn’t realistic for everyone, so let’s look at ways to limit your taxes.
Reduce Business Profits
If you’re a business owner, you can reduce your taxes by using business tax write-offs. Speak with your business accountant or tax professional to know which write-offs apply to you.
Use Roth Accounts
You use after-tax dollars when you contribute money to a Roth IRA or a Roth 401(k). This means that you don’t have to pay taxes when you withdraw the funds.
Distributions from your Roth IRA account are tax-free if you take them out after the age of 59.5 and have had the account for five years or more. Plus, this payout doesn’t affect your AG. So it won’t increase the taxes you owe on your Social Security benefits.
However, the government taxes distributions from traditional IRA accounts and 401(k) retirement plans.
Having a mix of regular and Roth retirement accounts long before retirement age will give you the flexibility to manage your withdrawals and minimize the taxes you owe on your Social Security benefits.
You can also use a mix of savings accounts, money market accounts, and tax-sheltered accounts to achieve this goal.
Withdraw or Sell Taxable Income Before Retirement
To minimize your taxable income when drawing Social Security, you can increase your taxable income before you start getting these benefits.
For example, you can take out money from your IRA or 401(k) after the age of 59.5 but before you start receiving Social Security. You won’t face a penalty for withdrawing early, but you will still pay income tax.
However, withdrawing before you earn Social Security means less AGI in the future since you have already removed the money.
This strategy needs careful planning. You still need to pay taxes, but the idea is to lessen the amount of taxes you pay. Keep in mind the required minimum distribution (RMD) rules when following this strategy too.
Additionally, if you increase your income when nearing retirement, you may be able to delay applying for Social Security benefits. This will make your payments bigger. But, make your payments too big, and you’ll face more taxes.
Further, if you own capital assets like stocks, bonds, or real estate, you can strategically sell them off to lessen your tax burden. Again, you will want to work with a tax professional to assess the best time to sell assets.
Selling capital assets as a loss can reduce your income. But, assets sold at a gain may be subject to capital gains taxes.
You can purchase a qualified longevity annuity contract (QLAC) to help reduce Social Security tax payments. You fund this deferred annuity with a qualified retirement plan or IRA investments.
A QLAC will give you monthly payments for life. Downturns in the stock market do not affect it either. If the annuity complies with IRS requirements, it is exempt from RMD rules until payouts begin after the specified starting date.
If you’re interested in buying a QLAC, speak with a retirement advisor to see if it’s a good financial decision for you.
Is Your Social Security Taxable, Explained
Knowing if your social security is taxable can be a complicated task as with all things taxes. Start by calculating your adjusted gross income (AGI). Then follow the IRS guidelines posted above.
If you’re still confused, it’s best to speak with a tax professional who can help you calculate your AGI and reduce your tax liabilities.
To get more questions answered about taxes, make sure to check out our Taxes section. You will find other great tax advice from the content posted there.