Will You Have to Pay Taxes on Your Social Security Benefits?
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Many retirees may not realize that Social Security benefits can be taxed. Whether these benefits are taxable depends on your income level. If Social Security is your sole source of income, you might avoid taxes altogether. However, if you have other income sources — such as a part-time job, retirement account distributions or investments — expect to pay taxes on at least some of your benefits. The federal government, and in some cases, state governments, tax Social Security benefits if your combined income exceeds certain thresholds.
How Social Security Benefits are Calculated
Social Security benefits provide financial support to retirees, individuals with disabilities, and their families. The amount you receive is based on your lifetime earnings and how much you've contributed to the Social Security system. Your benefit is calculated by averaging up to 35 years of your highest earnings and applying a formula to determine your primary insurance amount.
When it comes to taxation, the process starts by calculating your adjusted gross income, adding nontaxable interest and half of your Social Security benefits. This combined income determines whether your benefits are subject to taxes and how much you’ll owe.
How Much of Your Social Security is Taxable?
Your Social Security benefits are subject to taxes if your combined income exceeds certain thresholds. For individuals, if your income falls between $25,000 and $34,000, up to 50% of your benefits may be taxable. If your income exceeds $34,000, up to 85% of your benefits could be taxed. For married couples filing jointly, the limits are higher. If your combined income is between $32,000 and $44,000, up to 50% of your benefits will be taxable, and if it exceeds $44,000, up to 85% may be subject to tax.
Do Spousal, Survivor and Disability Benefits Get Taxed?
Spousal, survivor, and disability benefits are generally taxed similarly to retirement benefits. For instance, spousal Social Security benefits are taxed if your income is over $25,000 as an individual or $32,000 as a couple. Survivor benefits, particularly for minor children, are rarely taxed since children typically don’t have additional income. Social Security disability benefits are also taxed if your income exceeds the same thresholds as retirement benefits. However, Supplemental Security Income, a needs-based program for individuals who are blind, disabled, or over 65, is not taxed.
State Taxes on Social Security
In addition to federal taxes, some states tax Social Security income. Currently, 12 states impose taxes on Social Security benefits but the tax rules vary. Minnesota and Utah follow federal guidelines, taxing up to 85% of benefits based on income. The other states offer exemptions or deductions depending on age or income, meaning you may not be taxed on the full amount. If you live in one of the 38 states that don’t tax Social Security benefits, including Washington, D.C., you can breathe easier knowing that state taxes won’t impact your benefits.
How to Reduce Taxes on Your Social Security Benefits
While it may be challenging to completely avoid taxes on Social Security benefits, there are strategies to minimize the impact. One approach is to focus on Roth accounts, as income from Roth IRAs or Roth 401(k)s is not taxed in retirement. This can help keep your combined income below the taxable thresholds. Another strategy is to withdraw taxable income early. By taking money from taxable retirement accounts before you begin receiving Social Security, you may reduce your taxable income later, helping you manage your tax liability. In addition, some retirees opt to purchase an annuity, which can help distribute income in a tax-efficient manner during retirement.
Plan Ahead to Minimize Taxes
To avoid an unexpected tax burden, it’s essential to plan well before retirement. Understanding how Social Security benefits are taxed, both at the federal and state level, can help you manage your retirement income more effectively.