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.
You can, however, use some strategies, before and after you retire, to limit the amount of tax you pay on Social Security benefits. Keep reading to find out what you can do starting today to minimize the amount of income taxes you pay after retiring.
- 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.
Can I Work While Collecting Social Security?
How Much of Your Social Security Income Is Taxable?
Social Security payments have been subject to taxation above certain income limits since 1983. 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. 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.
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
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.
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.
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.
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.
An IRS Notice describes the tax rules for 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 needy and disabled people, and payments from it are not taxable.
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 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.
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.
Supplemental Security Income (SSI) is not Social Security but a needs-based program for people who are aged, disabled, or blind. 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. 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. As with the federal tax, how these agencies tax Social Security varies by income and other criteria.
When Social Security Is Not Taxable
You won't owe federal tax on your Social Security benefits if your total income falls below the taxable thresholds set by the IRS.
You won't owe state taxes on your benefits if you live in any of the 37 states that don't tax this income. You can minimize the tax burden by adopting one of the strategies below.
The average monthly Social Security benefit as of Oct. 2020. That's $16,807.92 a year.
3 Ways to Avoid Taxes on Benefits
The simplest way to keep your Social Security benefits free from income tax is to keep your total combined income so low it falls below the thresholds to pay tax. However, few choose to live in poverty just to minimize their taxes.
A more realistic goal is to limit how much tax you owe. Here's a rundown of three solutions:
1. Keep Some Retirement Income in Roth Accounts
Contributions to a Roth IRA or Roth 401(k) are made with after-tax dollars. This means they're not subject to taxation when the funds are withdrawn. So the distributions from your Roth IRA are tax-free, provided they're taken after you turn 59½ and have had the account for five or more years. Distributions taken from a traditional IRA or 401(k) plan, on the other hand, are taxable.
That means the Roth payout won't affect your taxable income calculation. That also means it won't increase the tax you owe on your Social Security benefits.
This advantage makes it wise to consider a mix of regular and Roth retirement accounts well before retirement age. The blend will give you greater flexibility to manage the withdrawals from each account and minimize the taxes you owe on your Social Security benefits.
A similar effect can be achieved by managing your withdrawals from conventional savings, money market accounts, or tax-sheltered accounts.
2. Withdraw Taxable Income Before Retirement
Another way to minimize your taxable income when drawing Social Security is to maximize, or at least increase, your taxable income in the years before you begin to receive benefits.
You could be in your peak earning years between ages 59½ and retirement. Take a chunk of money out of your retirement account and pay the taxes on it. You can use it later on without pushing up your taxable income.
For example, you could withdraw funds a little early—or "take distributions," in tax jargon—from your tax-sheltered retirement accounts such as IRAs and 401(k)s. You can make distributions penalty-free after age 59½. That means you avoid being dinged for making these withdrawals too early, but you must still pay income tax on the amount you withdraw.
Since the withdrawals are taxable (unless it's a Roth account), they must be planned carefully with an eye on the other taxes you will pay that year. The goal is to pay less in tax by making more withdrawals during this pre-Social Security period than you would after you begin to draw benefits. That requires considering the total tax bite from withdrawals, Social Security benefits, and any other sources.
Be mindful, too, that at age 72, you're required to take minimum distributions from these accounts, so you need to plan for those mandatory withdrawals.
This strategy has another benefit. By using these distributions to boost your income when you're retired or nearing retirement, you might be able to delay applying for Social Security benefits. And that will increase the size of the payments.
3. Buy an Annuity Contract
QLACs provide monthly payments for life and are shielded from the downturns of the stock market. As long as the annuity complies with IRS requirements, it is exempt from the required minimum distribution rules until payouts begin after the specified annuity starting date.
By limiting distributions, and thus taxable income, during retirement, QLACs can help minimize the tax bite taken from your Social Security benefits. Under the current rules, an individual can spend 25% or $135,000 (whichever is less) of a retirement savings account or IRA to buy a QLAC with a single premium. The longer an individual lives, the longer the QLAC pays out.
QLAC income can be deferred until age 85. A spouse or someone else can be a joint annuitant, meaning that both named individuals are covered regardless of how long they live.
Keep in mind that a QLAC shouldn't be bought just to minimize taxes on Social Security benefits. Retirement annuities have both advantages and disadvantages that should be weighed carefully, preferably with help from a retirement advisor.
How Do I Determine If My Social Security Is Taxable?
Add up your gross income for the year, including Social Security. If you have little or no income in addition to your Social Security, you won't owe taxes on it. If you're an individual filer and had at least $25,000 in gross income including Social Security for the year, up to 50% of your Social Security benefits may be taxable. For a couple filing jointly, the minimum is $32,000. If your gross income is $34,000 or more, up to 85% may be taxable. The minimum for a couple is $44,000.
What Percentage of Social Security Is Taxable?
If you file as an individual, your Social Security is not taxable only if your total income for the year is below $25,000. Half of it is taxable if your income is between $25,000 and $34,000. If your income is higher than that, up to 85% of your benefits may be taxable.
If you and your spouse file jointly, you'll owe taxes on half of your benefits if your joint income is between $32,000 and $44,000. If your income is above that, up to 85% is taxable income.
Do I Have to Pay Local Taxes on Social Security?
Thirty-seven states do not impose taxes on Social Security benefits. The other 13 tax some recipients under some circumstances.
Does Social Security Income Count as Income?
Yes, but you can minimize the amount you owe each year by making some wise moves before and after you retire. Consider investing some of your retirement savings in a Roth account, to shield your withdrawals from income tax. Take out some retirement money after you're 59½ but before you retire, to take care of the taxes before you need the money. And, you might talk to a financial planner about a retirement annuity.
The Bottom Line
Most advice on Social Security benefits focuses on when you should start taking benefits. The short answer, these days, is to wait until you're 70 to maximize the amount you get. But there's another big consideration, and that's how to prevent your Social Security benefits from taking a big bite out of your overall retirement income. And the answer to that is to plan well in advance to minimize your overall tax burden during your retirement years.