Taxation of Social Security
Eligibility to collect Social Security benefits begins at age 62, though many seniors wait until a later age in order to collect larger benefit amounts. Whether Social Security benefits are taxable by the Internal Revenue Service (IRS) depends on how much additional income the person filing taxes receives. Some states also assess taxes on benefits.
- Social Security benefits may or may not be taxed after 62, depending in large part on other income earned.
- Those only receiving Social Security benefits do not have to pay federal income taxes.
- If receiving other income, you must compare your income to the IRS threshold to determine if your benefits are taxable.
- Thirteen states tax Social Security benefits in some manner.
How to Determine if Social Security Benefits Are Taxable
Seniors whose only source of income is Social Security do not have to pay federal income taxes on their benefits. If they receive other sources of income, including tax-exempt interest income, they must add one-half of their annual Social Security benefits to their other income and then compare the result to a threshold set by the IRS. If the total is more than the IRS threshold, some of their Social Security benefits are taxable.
For 2020, the threshold amount is $25,000 for singles and $32,000 for married couples filing jointly. Married couples who live together but file separately have a threshold of $0 and must pay taxes on Social Security benefits regardless of other income earned.
The formula for calculating your combined income includes adding your adjusted gross income plus nontaxable interest plus half of your Social Security benefits. Your other income, which is included in adjusted gross income, can come from a part-time job or 401(k) withdrawals.
More specifically, Social Security benefits are taxed as follows:
- Up to 50% of Social Security benefits are taxed on income from $25,000 to $34,000 for individuals or $32,000 to $44,000 for married couples filing jointly.
- Up to 85% of benefits are taxable if the income level is over $34,000 for individuals or $44,000 for couples.
Taxable Social Security Benefits
Say your Social Security benefits are taxable based on your combined income. The amount of tax you pay depends on your level of income. Specifically, the difference between your combined income and the IRS base amount (e.g., $25,000 for single filers).
You’ll never pay taxes on more than 85% of your Social Security benefits.
Thirteen states tax Social Security benefits under certain circumstances: Colorado, Connecticut, Kansas, Minnesota, Missouri, Montana, Nebraska, New Mexico, North Dakota, Rhode Island, Utah, Vermont, and West Virginia. Iowa used to assess taxes on benefits, but it phased the taxes out completely in 2014, while New Mexico exempts some benefits for beneficiaries age 65 and over. These states tax Social Security benefits with varying methods, which can include using adjusted gross income or other figures.