Since 1984, Social Security beneficiaries with total income exceeding certain thresholds have been required to pay federal income tax on some of their benefit income.
At present, the Social Security Administration projects that about 56% of beneficiary families will owe federal income tax on part of their benefit income from 2015 through 2050.
And if you are among that 56%, here’s what you need to know about income taxes and your Social Security benefit.
First, how much federal income tax you have to pay on your Social Security benefit depends on your combined income or what is sometimes called provisional income.
Combined or provisional income includes modified adjusted gross income (MAGI) plus one-half of Social Security income, plus tax-exempt interest, according to Elaine Floyd, director of retirement and life planning at Horsesmouth and author of "Savvy Social Security Planning for Boomers."
Based on Internal Revenue Service rules, if you file a federal tax return as:
Single, Head of Household, Married Filing Separately (and lived apart from your spouse the entire year) and your combined income is
- 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.
Married Filing Jointly, and you and your spouse have a combined income that is
- 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.
Married Filing Separately and lived with your spouse, you probably will pay taxes on your benefits.
(For more, read: Entitlement To Retirement, Survivors, And Disability Insurance Benefits)
| Filing status | Provisional income | Amount of Social Security subject to tax |
|---|---|---|
Married, filing jointly |
Under $32,000 $32,000-$44,000 Over $44,000 |
0 50% 85% |
Single, head of household, qualifying widow(er), married filing separately and living apart from spouse |
Under $25,000 $25,000-$34,000 Over $34,000 |
0 50% 85% |
Married filing separately and living with spouse |
Over $0 |
85% |
The above table, however, does not tell the whole story, according to Floyd. If provisional income is over one of the threshold amounts, the lesser of 85% (or 50%) of either Social Security benefits or the amount by which provisional income exceeds the threshold is added to gross income for tax purposes, she noted.
For example, if income is just $1,000 over the $44,000 threshold, 85% of the $1,000—not 85% of all Social Security benefits—would be added to income, she noted.
“This provides somewhat of a tax break for moderate-income Social Security recipients, but it has the deleterious effect of raising their marginal tax rate,” Floyd said.
Once income is high enough that the full 85% of benefits are subject to income tax – which is not hard today given that the thresholds established in 1993 were never adjusted for inflation – there is little a person can do to change that other than to keep other income low in order to reduce the overall tax rate.
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The mechanics
So, what are the mechanics of paying the tax?
Each January, you will receive a Social Security Benefit Statement (Form SSA-1099) showing the amount of benefits you received in the previous year. The IRS provides a worksheet you can use to figure your taxable benefits in the Instructions for Form 1040. Generally, though there are some exceptions, you can use either that worksheet or Worksheet 1 in this 2022 Publication 915.
According to Floyd, the full amount of Social Security income received is entered on Form 1040, Line 6a and the taxable amount is entered on Line 6b. This amount on Line 6b is added together with other income and taxed in the usual progressive manner, she noted.
Note: If you do have to pay taxes on your Social Security benefits, you can make quarterly estimated tax payments to the IRS or choose to have federal taxes withheld from your benefits.
Reducing taxable income in retirement
If some or all of your Social Security income will be taxable, you might want to work on reducing your overall taxes. The idea here is to both reduce your spending needs so you won’t need so much income in retirement and also employ certain tax-saving strategies, according to Floyd. These include:
- Reduce debt: By paying down debts prior to retirement, you won’t need to generate the taxable income necessary to service those debts.
- Convert traditional IRAs to Roth IRAs: Roth IRA withdrawals are not taxable, so converting traditional IRAs to Roth IRAs prior to retirement can help to reduce taxable income in retirement.
- Start drawing down traditional IRAs before you need to. Once RMDs kick in you have no choice but to take the required amount of taxable income. You can reduce your RMDs by taking voluntary withdrawals before then.
- Invest for growth: Investing in assets that appreciate, such as growth stocks, rather than income-producing investments such as bonds and dividend-paying stocks, can help to reduce taxable income in retirement.
- Invest in annuities: Annuities can help to reduce taxable income in retirement by providing a stream of income that can be partially tax-free.
Mike Piper, author of “Social Security Made Simple,” noted the following:
- First, the higher your income, the greater the portion of your benefits that will be taxable (up to 85%.) The result is that once you're receiving Social Security, through a certain range of income, your actual marginal tax rate is much higher than just your tax bracket, because each dollar of income is also causing 50 cents or 85 cents of Social Security benefits to become taxable. The result is that many retirees have a higher marginal tax rate in retirement than anticipated (which means that pre-Social Security Roth conversions would likely have been helpful).
- Second, at most, 85% of Social Security benefits are taxable — and they're often not taxable at all at the state level. (Eleven states tax all or part of Social Security income; all other states and the District of Columbia do not tax Social Security payments.) As a result, it often makes sense to essentially "trade" IRA dollars for more Social Security dollars. When one spends down tax-deferred balances to delay filing for Social Security, they're giving up future growth in the tax-deferred account (i.e., future dollars that generally would have been fully taxable when they come out of the account) in exchange for more Social Security. That is, they're giving up fully taxable dollars in order to get not-fully-taxable dollars, which is generally a good thing.
For more information about taxation of benefits, read Retirement Benefits or IRS Publication 915, Social Security and Equivalent Railroad Retirement Benefits.
Editor's Note: The content was reviewed for tax accuracy by a TurboTax CPA expert for the 2022 tax year.
Robert Powell is editor and publisher of Retirement Daily on TheStreet.
