How Is Social Security Income Taxed?

Cash on top of Social Security cardsIf you’ve begun collecting Social Security income, you might be uncertain about how that income will be taxed, if at all. Many people are under the impression that Social Security income is never taxed, but this isn’t true; tax rates on that income will vary depending on your total combined income. And, because Social Security distributions are not taxed upfront, many retirees find themselves surprised by the amount they owe when it comes time to file. Here’s what you need to know about Social Security income tax, so that you’re not blindsided when you file your return.

Individual Return Tax Rates

If you file an individual tax return while receiving Social Security income, here are your current tax rates:

  • Total income below $25,000 – Social Security benefits are not taxed
  • Total income between $25,000 and $34,000 – Up to 50% of benefits may be taxable
  • Total income over $34,000 – Up to 85% of benefits may be taxable

Your total income will include your adjusted gross income (AGI) and nontaxable interest, plus half of your Social Security income. Please also note that when we say 50% or 85% of your benefits may be taxable, this does not mean that you’ll lose that percentage of your benefits to taxes; rather, it means that your tax rate will be applied to that portion of your benefits, while the remainder will be untaxed.

Joint Return Tax Rates

If you file a joint tax return with your spouse, your tax rates for your Social Security income are as follows:

  • Total income below $32,000 – Social Security benefits are not taxed
  • Total income between $32,000 and $44,000 – Up to 50% of benefits may be taxable
  • Total income over $44,000 – Up to 85% of benefits may be taxable

In the cases of individuals and couples who rely solely on Social Security benefits, your Social Security income will not usually be taxed. Most often, your benefits will only be taxed when there is supplementary income that pushes your AGI over the thresholds mentioned above.

Reducing Taxes on Your SSI

As we mentioned earlier, Social Security income is not taxed upfront. So, if a portion of your income does end up being taxed, you may find yourself owing a large lump sum when you file your return. This can be difficult on those living on a fixed income. If you’re looking to reduce the taxes on your SSI, here are a few options:

  • Request voluntary withholding on your Social Security benefits. Just as you can increase your withholdings on a paycheck, you can request to have taxes withheld from your SSI upfront, so that you don’t have to pay it all during tax season. You can do this by calling the Social Security Administration and requesting IRS Form W-4V, or you can find the form on the IRS’s website here.
  • Draw from other retirement accounts first. Because having additional income is more likely to make your Social Security benefits subject to tax, you can elect not to sign up for these benefits as soon as you retire. Draw down your other accounts first, then sign up for Social Security benefits so that you don’t have simultaneous sources of income.
  • Monitor your income and plan ahead. Now that you know the thresholds for your SSI to be taxed, you can be more proactive about monitoring your income sources to ensure you stay beneath these thresholds, reducing the amount of your Social Security benefits that will be subject to tax.

It’s also important to know what sources of income are subject to tax, so that you can take better control of your finances during retirement. For example, withdrawals from a Roth IRA will not make your SSI taxable, so you can use these accounts to supplement your SSI without worrying about having your benefits taxed. Our expert tax planners can also help you with this.

A Note on State Taxes

Please note that the above thresholds only apply to federal taxes on Social Security benefits. About half of the states in the country also tax Social Security income, so be sure to look into the Social Security tax rates for your state. This is something else we can help with.

If you need assistance with filing your taxes or planning for the coming tax season, please reach out to us. We want to help all our customers to take control of their finances so that they can better understand and monitor their taxes long before they file their returns. Give us a call to schedule a tax consultation with a CPA today.