The following is presented for informational purposes only and is not intended as tax or legal advice.
Social Security benefits can give you a reliable and steady income. However, up to 85 percent of your Social Security benefits, including retirement, survivor, and disability benefits (but not Supplemental Security Income) may be taxable depending on your total income.
Knowing the income limits and rules can help you decide when to start taking Social Security benefits, predict the impact of taking on extra work or withdrawing money retirement accounts, and help you estimate your income taxes for the year.
The tax rate depends on your total income
To determine if your Social Security income is taxable, you’ll have to add half your Social Security benefits to your total taxable income and compare the amount to the “base amount” for your tax filing status.
To do this:
- Add up all your income for Social Security and Equivalent Railroad Retirement benefits. These will be in box 5 of your Forms SSA-1099 and RBR-1099.
- Divide your total benefits in half.
- Add up all your taxable income from wages, interest, dividends, capital gains, taxable retirement account withdrawals, and any other sources. Include tax-exempt interest, such as interest from municipal bonds, to this amount.
- Combine half your benefits with your taxable income to find your “total income.”
There are also some circumstances, such as if you made tax-deductible contributions to a traditional individual retirement account (IRA) or if you received a lump-sum payout of a previous year’s Social Security benefits, that can impact your total income. Online calculators and tax preparation worksheets will walk you through calculating your total income in these special circumstances.
In the end, if your total income is at or above one of the following points (called base amounts), then you may need to pay income taxes on part of your Social Security benefits.
|Tax Filing Status||Up to 50% of your Social Security income is taxable||Up to 85% of your Social Security income is taxable|
|Single, Head of Household, or Qualifying Widow(er)||$25,000||$34,000|
|Married Filing Jointly||$32,000||$44,000|
|Married Filing Separately*||$0||$0|
*If you lived apart from your spouse for the entire year, use the amounts from the first row. If you lived together at any point, your base amount is $0 and up to 85 percent of your benefits are taxable.
Your effective tax rate can vary
If your total income is above the base amount for your filing status, you’ll likely have to pay some income tax on your Social Security benefits.
We won’t drag you through the entire process — the calculation worksheets have 19 steps and can be fairly complex. But know that you may wind up paying income taxes on less than 50 or 85 percent of your benefits taxable, that’s simply the maximum amount.
To determine your effective tax rate and how much you owe, you can use an online calculator (such as this one) that will do the calculations for you and show you a summary of how it determined the results. Or, the IRS’s Publication 915 has worksheets you can use to do the calculations on your own.
Don’t forget about state income taxes
In addition to paying federal income taxes, you may have to pay state income taxes if you live in one of the 13 states that taxes Social Security benefits: Colorado, Connecticut, Kansas, Minnesota, Missouri, Montana, Nebraska, New Mexico, North Dakota, Rhode Island, Utah, Vermont, and West Virginia.
If you live in one of these states, look up how and when it taxes your Social Security benefits. The formula doesn’t always match the IRS’s formula, and there may be deductions, exemptions, and credits that can decrease your overall state tax payments.
Strategies for minimizing your taxes
Knowing that your total income will determine when, and by how much, your Social Security benefits are taxable, you could look for ways to decrease how much you owe.
- Delay claiming retirement benefits. You may be able to start receiving Social Security retirement benefits when you turn 62. However, waiting to start your benefits can increase your monthly benefit amount. If you’re still working when you’re 62, it may make sense to wait until you stop working before starting to receive your retirement benefits. Your Social Security benefits will increase, but you’ll be making less money overall, which could decrease how much you may have to pay in income taxes.
- Consider required minimum distributions. If you have a traditional IRA, you may have to start withdrawing money (or pay a steep penalty) once you turn 70-and-a-half. Keep this in mind as you consider how your total income could change.
- Tap your IRA first. With the above two tips in mind, if you’re not working and are at least 59-and-a-half years old, you might want to start withdraw money from IRAs rather than taking Social Security. The delay could increase your benefit amount, keep you from paying taxes on Social Security benefits now and decrease your required distributions later.
- Plan with pensions in mind. If you aren’t working, it might make sense to start taking Social Security retirement benefits as early as possible if you know you’ll have a pension or other retirement income that will increase your total income later.
- Strategically take Roth withdrawals. Roth IRA and 401(k) withdrawals won’t count toward your total income. If you’ve been saving in one of these accounts and need extra income, but are at or above the base income threshold, you may want to start drawing from your Roth accounts before taking money from taxable retirement accounts.
If you know you’ll have to pay income taxes on your Social Security benefits, you may want to have taxes automatically withheld from your monthly Social Security payments. You can do this by submitting Form W-4V and selecting whether you want 7, 10, 12, or 22 percent withheld from each payment. Alternatively, you could make estimated payments throughout the year.
Article written by Louis DeNicola. Louis is a personal finance writer with a passion for sharing advice on credit and how to save money.