Social Security is a vital source of income for millions of people. However, when it comes to taxes on Social Security benefits, confusion and misinformation often come into play.
One common misperception is that Social Security benefits are entirely tax-free. However, it has been the rule for many years that some portion — in some cases, up to 85% — of your Social Security benefits can be taxable, depending on your income.
This system can have major implications for retirement planning since the tax calculation involves not only income from Social Security but also other common sources of retirement income like pensions, investments, and tax-exempt interest. (More on that below).
So, understanding how your Social Security benefits are taxed is important for navigating your financial future and making informed decisions to enhance your overall security in retirement.
Related: Six Tax Breaks That Get Better With Age
Taxes on Social Security benefits
To get you started, here are five things to know about the ins and outs of taxes on Social Security.
1. Is Social Security taxable?
First, some, but not all of your Social Security benefits are subject to tax. The portion of your benefits that may be taxable varies since it depends on your income.
The IRS uses a tiered system based on “combined income.” (Combined income is your adjusted gross income plus nontaxable interest and half of your Social Security benefits from the year.)
The net amount of Social Security benefits you receive is reported in Box 5 of your Social Security benefit statement (Form SSA-1099).
According to the IRS, your benefits may be taxable if the total of your combined income is greater than the base amount for your filing status.
*Single includes single, head of household or qualifying widow or widower
- If your combined income is under $25,000 (single) or $32,000 (joint filing), there is no tax on your Social Security benefits.
- For combined income between $25,000 and $34,000 (single) or $32,000 and $44,000 (joint filing), up to 50% of benefits can be taxed.
- With combined income above $34,000 (single) or above $44,000 (joint filing), up to 85% of benefits can be taxed.
Base amounts for the different filing statuses are:
- $25,000: For single, head of household, or qualifying surviving spouse
- $25,000: For married filing separately and lived apart from your spouse for the entire year
- $32,000: Married filing jointly
- $0 if you're married, filing separately, and lived with your spouse at any time during the tax year. (This means you will likely pay taxes on your benefits.)
Note: If you're married and file a joint return, you and your spouse must combine your income and Social Security benefits when figuring out the taxable portion of your benefits. That’s true even if your spouse didn't receive any benefits.
It's also a common misconception that tax rules for Social Security apply only to retirement benefits. But benefits from Social Security trust funds, including survivor and disability benefits, are subject to tax rules. However, Supplemental Security Income (SSI) payments are not taxable.
The IRS provides an online tool to help you determine how much, if any, of your Social Security income is taxable.
2. Your income matters more than retirement age
You can see from the tiered system how much your income matters. However, there are a lot of misconceptions about Social Security benefits becoming tax-exempt when recipients reach a certain age. Notably, a common question on Google is at what age are Social Security benefits no longer taxed?
In fact, it's mostly your income and filing status (not your age) that determine whether you pay income taxes on your benefits — and how much.
For more information, see Do You Stop Paying Taxes on Social Security at a Certain Age?
3. You can ask for Social Security withholding
If you are worried about owing taxes on your Social Security benefits, you can choose to have federal taxes withheld from your monthly Social Security payments. By having taxes withheld, you prepay a portion of your tax bill.
The withholding options are 7%, 10%, 12%, or 22% of your benefits. You can select this option when you apply for Social Security or by completing and submitting IRS Form W-4V.
If you prefer, you can also make quarterly estimated tax payments to cover anticipated tax liability.
- Making estimated payments may be preferable if you have variable sources of income or need payment flexibility.
- These payments might also be better suited for those with higher total tax liability or who want to maximize their monthly Social Security benefits.
- On the other hand, withholding from your Social Security check might be preferred if you like automatic deductions and have relatively predictable income.
For more information, see Kiplinger's report: Withholding Taxes From Your Social Security Benefits.
4. Social Security COLA increase can impact your taxes
The taxes on Social Security can be impacted by the cost-of-living adjustment (COLA). COLA increases can cause some recipients to move into a higher federal income tax bracket — particularly when inflation is high as it has been for the last few years.
The Social Security COLA for 2024 is 3.2%. This is a significant drop from the previous year's COLA of 8.7%, the highest COLA in over 40 years.
What about 2025? The Social Security COLA for 2025 is 2.5%.
This more modest increase reflects the cooling inflation trend from the last few months. Though a lower increase can bring financial hardship for some, there could be some tax benefits to consider.
For more information, see Silver Lining? Four Tax Benefits of a Lower Social Security COLA.
5. Some states tax Social Security benefits
Social Security benefits are not taxed in most states, but for 2024, eight states still tax Social Security benefits. (That's three states down from last year.) Those states include Colorado, Connecticut, Minnesota, Montana, New Mexico, Rhode Island, Utah, and Vermont. As Kiplinger has reported, Utah might soon eliminate its Social Security tax.
Note: New Mexico technically taxes Social Security benefits, but many retirees won’t pay a dime to the state at tax time. That’s because legislation passed last year provides higher income thresholds for exempting Social Security benefits.
Some state criteria for determining income tax are more generous than the federal government's. That can mean higher income thresholds (as in the case of New Mexico) or higher deductions and exemptions that can lower the tax burden for taxpayers.
Social Security benefits and income tax: Bottom line
Knowing how Social Security and taxes work is vital to making informed financial decisions in retirement. Since Social Security benefits can have tax implications, it's important to plan to avoid surprises.
It's also important to know how the IRS taxes common types of retirement income so that you can develop a tax-efficient strategy for your retirement years. Seeking the advice of a trusted tax professional can help as well.
