Many Americans depend on Social Security after retirement, but what many don’t know is that these benefits can be taxed. Whether or not your Social Security payments will be taxed depends mainly on your total income, not just the amount you receive from Social Security. This includes earnings from wages, self-employment, investments, and even tax-exempt interest.
The IRS uses a formula called “combined income” to figure out how much of your Social Security benefits are taxable. Combined income is the total of your adjusted gross income, any non-taxable interest (like interest from municipal bonds), and half of your Social Security benefits. Once this total is calculated, the IRS uses it to see if your income crosses certain limits or “thresholds.”
If you’re a single filer and your combined income is below $25,000, your Social Security benefits are not taxed at all. If it falls between $25,000 and $34,000, you might have to pay income tax on up to 50% of your Social Security benefits. If your combined income is more than $34,000, you could be taxed on up to 85% of your benefits.
For married couples filing jointly, the thresholds are higher. If your combined income is below $32,000, there’s no tax. Between $32,000 and $44,000, you may be taxed on up to 50% of your benefits. Above $44,000, you might have to pay tax on up to 85% of your Social Security income.
It’s important to note that even if a portion of your benefits is taxed, the entire amount isn’t. The IRS only taxes the part of your Social Security benefits that fall within your income bracket. And no, your benefits will never be 100% taxable—85% is the maximum limit.
The actual tax rate you pay on your Social Security benefits depends on your overall taxable income and the tax bracket you fall into. Just because 85% of your Social Security benefits are considered taxable doesn’t mean you pay 85% in tax. It just means that up to 85% of your benefits are counted as income and taxed at your regular income tax rate.
These rules apply only to federal income tax. Some states also tax Social Security benefits, but most do not. According to the Social Security Administration, only 12 states currently tax Social Security income. These states are Colorado, Connecticut, Kansas, Minnesota, Missouri, Montana, Nebraska, New Mexico, Rhode Island, Utah, Vermont, and West Virginia. Each of these states has its own rules and exceptions, so it’s best to check with your state’s tax department for details.
The good news is that if your only income comes from Social Security, there’s a good chance you won’t owe any federal taxes. But if you have other sources of income—like a pension, retirement account withdrawals, or part-time work—you could end up owing taxes on your benefits.
You can find out if your Social Security benefits will be taxed by using the IRS’s online tools or talking to a tax professional. If you think you’ll owe taxes, you can ask the Social Security Administration to withhold federal taxes from your monthly payments. This can help you avoid a surprise tax bill at the end of the year.
Planning ahead is important. Understanding how the IRS taxes your benefits allows you to better prepare for retirement and avoid unexpected tax issues.
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