In 1983, President Reagan signed legislation that imposed income tax on up to 85% of a person's Social Security benefits.
Social security retirement benefits provide supplemental income for qualified retirees, replacing a percentage of their pre-retirement income based on their lifetime earnings. Most beneficiaries receive about 40% of their pre-retirement income once they retire.
Because Social Security benefits are a form of income, some people may be required to pay federal income taxes. Knowing how Social Security benefits are taxed at both the federal and state level, as well as tips for paying taxes on these benefits, can help ensure you don't get in trouble with the IRS.
When is Social Security taxable?
If you have a substantial income in addition to your Social Security benefits, you may have to pay federal income taxes on those benefits. Examples of income include:
- Other taxable income that you'd report on your tax return
The good news is you'll only pay tax on up to 85% of your monthly retirement, survivor, or disability benefits based on IRS rules.
You'll have to pay taxes if:
File a federal tax return as an "individual"
Combined income* is between $25,000 and $34,000
May have to pay income tax on up to 50%of your benefits
Combined income* is more than $34,000
May have to pay income tax onup to 85%of your benefits
File a joint return
Combined income* is between $32,000 and $44,000
May have to pay income tax on up to 50% of your benefits
Combined income* is more than $44,000
May have to pay income tax on up to 85% of your benefits
If you are married and file a separate tax return, you'd probably pay taxes on your benefits.
*Combined Income: Your adjusted gross income (AGI) + nontaxable interest + 1/2 of your Social Security benefits
Note that adjusted gross income (AGI) includes income from Social Security benefits and all other sources, such as wages, self-employed earnings, interest, dividends, required minimum distributions from qualified retirement accounts, and any other taxable income.
For example, say you were an individual taxpayer who received $15,000 in Social Security. You also have $20,000 in "other" income. Added together, your gross income is $35,000. However, your combined income is only $27,500 (other income plus half of your Social Security benefits). This puts you within the $25,000-$34,000 range for up to 50% of your benefits being taxed.
So, half of the difference between that income and the $25,000 threshold is your taxable amount:
$27,500 – 25,000 = $2,500; $2,500/2 = $1,250
In this example, your taxable amount is $1,250.
According to the Social Security Administration, about 40% of those who get Social Security must pay income taxes on their benefits.
How do I know if my Social Security is taxable?
Determining whether your Social Security is taxable can be confusing, so it's recommended to work with a tax professional to ensure you're entering the correct amounts and paying the right amount of taxes. Or, you can use IRS's Interactive Tax Assistant (ITA), which is a free online tool that provides answers to many taxes law questions specific to your individual circumstances. For example, it can determine:
- If you must file a tax return
- Your filing status
- If you can claim a dependent
- If the type of income you have is taxable
- If you're eligible to claim a credit
- If you can deduct expenses
You can also figure if your Social Security is taxable on your own. Start by adding together your gross income for the year, including Social Security benefits:
- If you have little or no income in addition to Social Security, you will not owe taxes.
- If you're an individual filer and have at least $25,000 in gross income (including Social Security), up to 50% of your Social Security benefits may be taxed. If you're a couple filing jointly, the minimum is $32,000.
- If your gross income is $34,000 or more (or $44,000 or more for couples filing jointly), then up to 85% may be taxable.
You can also learn more about what you'd owe through Social Security's publications about retirement benefits.
Additionally, note that there are 13 states that tax Social Security benefits at the state level:
- New Mexico
- North Dakota
- Rhode Island
- West Virginia
Taxes can vary by state, so if you live in a state listed above, check with your local agency to better understand the state tax rules.
How to pay taxes on Social Security
In January every year, you'll receive a Social Security Benefits Statement (Form SSA-1099) that will show the amount of benefits you received in the previous year. When completing your federal income tax return, you can use this statement to understand whether your benefits are subject to taxes.
Another tool you can use to figure out your taxable benefits includes this IRS worksheet, where you can enter your income and other information to determine how much you'd owe.
If you do have to pay taxes on your Social Security benefits, you have two ways to do so:
- Make quarterly estimated tax payments to the IRS
- Have federal taxes withheld from your benefits
If you opt to have federal taxes withheld, you must complete the Form W-4V and choose whether you'd like 7%, 10%, 12%, or 22% of your monthly benefit withheld for taxes. You're not required to have taxes withheld, but it may be easier than paying quarterly estimated payments.
If you lost or never received an SSA-1099 form, you can get a replacement through your my Social Security account. Simply select the "Replacement Documents" tab to request the form.
How to avoid paying taxes on Social Security benefits
There are a few ways to keep your Social Security benefits from being taxed, but the key is to keep your total combined income below the threshold for paying taxes. Examples of ways to do this include:
- Keeping some retirement income in a Roth IRA or Roth 401(k), because these contributions are made with after-tax dollars and are not subject to taxes when funds are withdrawn. This does not affect your taxable income.
- Withdraw taxable income before retiring and before you start to receive benefits. As long as you don't take out funds too early, getting hit with an early-withdrawal penalty, you could take distributions from your tax-sheltered retirement accounts. However, you must keep an eye on other taxes you'd pay that year to ensure you're paying less in tax by making more withdrawals now than you would later.
Paying Social Security taxes can have a big impact on the amount of benefits you get and your overall retirement income. The more taxes you have to pay, the less you have for other spending. However, with planning, you may be able to decrease the tax burden on these benefits.