Is Social Security Taxable? | Complete Guide + Tips Inside

Most Social Security beneficiaries will pay some income tax on at least a portion of their benefits. However, the specific amount owed will depend on a few factors. The IRS began taxing Social Security benefits in 1984, and those rules have stayed more or less the same ever since. The total amount of your income and the status of your tax return will help determine what percentage of your benefits will be taxed. Read on as we explain all the details to help you learn everything you need to know about paying taxes on your Social Security benefits.

How much of your social security income is taxable?

If you’re reading this, you’re probably wondering, “Are Social Security benefits taxable?” How does social security work by providing benefits to retired workers so that paying taxes on those benefits doesn’t partially defeat that purpose? Fortunately, you’ll never have to pay taxes on the full amount of your Social Security income. However, you may have to pay taxes on up to 85% of that income. It really depends on how much additional income you have from your Social Security payments and whether you file an individual tax return or a joint tax return. Let’s take a look at both situations.

Individual tax rates

If you file an individual federal income tax return and your gross income is less than $25,000, your Social Security payments will not be subject to income tax. In 2020, the median Social Security income was around $18,000. Therefore, if you relied solely on Social Security payments with no other income, you would not be required to pay any tax on that income.

However, if your combined earnings were between $25,000 and $34,000, you would have to pay income taxes on 50% of your Social Security benefits. Increase the combined income even more and you will need more. Once the $34,000 threshold is crossed, 85% of profits become taxable. We will discuss the details of calculating the combined income amount in the next section.

Tax rates for spouses

If you are married and file a joint federal return with your spouse, your benefits will be taxed in the same way as an individual return. However, the income limits are slightly different. Joint filers can earn up to $32,000 without paying income tax on their benefits.

Once the amount of combined income reaches $32,000 up to $44,000, half of the Social Security benefits will be considered taxable income. If you report combined income of more than $44,000, you will be taxed on 85% of our benefits. So you can see that if you and your spouse receive the average amount of Social Security (about $18,000), you’ll likely pay taxes on half of your benefits.

We will now delve into what exactly constitutes combined income and how these calculations are made.

Calculation of social security income tax

Adjusted gross income, net income, combined income… what does it all mean? All of these terms can be confusing, but they are extremely important when it comes to calculating how much tax you will owe the IRS.Planning for your taxes on Social Security benefits will help you be prepared when it’s time to pay. We’ll explain the details of these terms and then go over a couple of examples.

When calculating the amount of tax you owe on your benefits, the IRS has created a worksheet to help you calculate your taxable benefits. There are more calculations to be done in the worksheet , but these are the basics. First, you’ll need to find the total amount of Social Security benefits you received for the year. You should receive an SSA-1099 form as part of your annual Social Security statement that will show the amount of your benefits for the tax year.

Next, you must determine the amount of additional income you received during the tax year. This could be retirement income from an IRA, income from a part-time job, or even nontaxable interest income. Once you have these numbers, it’s time to do the math.

You’ll need to take the full amount of your “other income” and add half of your Social Security benefits to get your combined income. So let’s say you’ve received the average benefits of $18,000 for 2020 and had $22,000 of other income from retirement accounts. This gives you a gross income of $40,000. To get your combined income, you’ll take $22,000 of other income plus half of your SS benefits, which would give you $31,000 ($22k + $9k).

Since your combined income in this case is $31,000, this means that the Internal Revenue Service will consider half of your benefits taxable because it falls within the range of $25,000 – $34,000 for individuals. To get your net taxable income, you’ll use half of your SS benefits ($9,000) plus your other income ($22,000) and subtract any itemized or standard deductions.

For married couples filing jointly, the calculations are much the same. However, it will use both people’s income in the calculation and use the joint storage ranges. But the details of the calculations are the same.

How to minimize social security taxes

Nobody likes paying taxes, and most people are always looking for ways to minimize the amount of taxes they owe. This is no different for people who receive Social Security benefits. Fortunately, there are some things you can do to minimize the amount of taxes you’ll have to pay while receiving your benefits. We’ll take a look at some of these methods here.

1. Use Roth accounts

Traditional IRAs and 401ks are funded with pre-tax dollars. Distributions withdrawn from these accounts are therefore considered taxable income. A great way to reduce taxable income is to use Roth accounts. These are retirement accounts funded with after-tax dollars. Distributions from these accounts are not taxable since the taxes were already paid before the money was credited to the account.

Because these distributions are tax-free, the Social Security Administration does not count this income as part of adjusted gross income in calculating combined income. As seen in the previous section, the lower the combined income, the lower the amount of benefits that will be taxed.

Generally, it’s a good idea to manage your retirement accounts through a combination of traditional and Roth accounts. At full retirement age, this allows you to manage your distributions in a way that minimizes your tax bill.

2. Buy an annuity

Buying an annuity is another way to lower your tax bill, but not just any annuity will work. You will need to specifically look for a qualified annuity contract or QLAC. A QLAC is an annuity that is purchased with funds from a retirement account and monthly payments can be deferred until age 85.

Under current rules, a person can use up to 25% less or $135,000 from a retirement savings account to purchase a QLAC. Deferring payments from this annuity contract may help reduce gross income and thus reduce the amount of Social Security income that can be considered taxable.

However, you should be aware that annuity contracts have advantages and disadvantages. Buying one simply to avoid Social Security taxes may no longer make sense to you. You should always consult a financial professional for advice on how best to manage your personal situation.

3. Make taxable withdrawals before retirement

Another way to avoid higher taxes is to participate in the pension distribution before you start receiving social security. Most people start receiving SS benefits at age 67, and most retirement accounts allow penalty-free distributions starting at age 59½. It may make sense for you to go ahead and start receiving your pension distributions before Social Security benefits begin.

While this can potentially lower your income once you start receiving Social Security, you should be aware that this will increase your income in your younger years. Therefore, be aware of their tax implications when you begin receiving these distributions. While there is no penalty for withdrawing these funds early, you will still need to pay taxes on the funds.

Are SSI, disability, survivor or spouse benefits taxable?

These programs generally follow the same tax rules as Social Security retirement benefits. However, SSI is an exception to this rule as it is a needs-based program. Let’s go ahead and take a look at each one.

1. Supplemental Securities Income (SSI)

The benefits of this program are not subject to income tax. To qualify for this program, the beneficiary must have little or no income or resources. Therefore, their income would not exceed the threshold to request taxation of the benefits they receive.

2. Disability benefits

SSDI benefits are taxable. Disability benefits follow the same tax rules as retirement benefits. If you file an individual return and have more than $25,000 in combined income, at least half of your benefits will be taxable. If your earnings are over $34,000, 85% of your benefits will be subject to income tax.

3. Survivor Benefits

Survivor benefits paid to children are subject to the same tax rules as pension benefits. However, most children have no additional income beyond the benefits themselves. So, in reality, survivor benefits are rarely taxed because income amounts are almost always below the threshold.

You should also note that survivor benefits paid to children do not count as taxable income for the parent or guardian receiving the benefit on behalf of the child. This income does not have to be declared by the parent or guardian who receives it.

4. Marital benefits

Again, this benefit follows the same rules as retiree benefits. When you look at your total combined income, you’ll have to pay taxes on half of these benefits if the amount is more than $25,000. If it exceeds $34,000, you will be required to pay taxes on 85% of the profits.

Understanding State Taxes on Social Security Benefits

So far we have only discussed the federal income tax implications. But depending on the state you live in, you may also have to pay state taxes on your benefits. Most states do not tax Social Security benefits. However, some states tax these benefits following federal tax guidelines and others tax them according to their own specific state rules.

States that follow federal tax rules: Vermont, West Virginia, Minnesota, North Dakota. West Virginia recently began phasing out state taxes on SS benefits. Beginning in 2021, most state residents will have to pay taxes on their benefits.

States that partially tax SS benefits: Kansas, Connecticut, Colorado, Montana, Nebraska, Missouri, Rhode Island, Utah, New Mexico. These tax benefits for states to varying degrees. You may be eligible for exemptions based on your age and income level in these states. You should contact a tax professional or consult your state-specific rules to determine the amount of tax due if you are a resident of one of these states.

The remaining 37 states do not impose any state income tax on Social Security benefits. You may still have to pay state taxes on distributions or retirement benefits from your private retirement accounts or other income, but no state taxes will be paid on your social security benefits.

Conclusion

If you’re receiving Social Security benefits, you may be wondering what to do around tax time. In some cases, you may be required to pay taxes on at least a portion of that income. However, there are ways to reduce those IRS payments, such as putting money away in a Roth IRA or withdrawing some of your retirement benefits early. The amount of your benefits that is considered taxable will depend on your total income (including tax-free interest) and whether you are filing individually or married filing jointly. Most states do not tax your benefits, although some do. Now that you have this information, you should be able to approach tax season with confidence knowing exactly how your benefits will be treated.

Frequent questions

At what age is social security not taxable?

There is no age at which Social Security benefits become completely non-taxable. Whether or not your benefits are taxable depends on your adjusted gross income (AGI), your calculated combined income, and your filing status. If your combined income is below the threshold for your filing status, your benefits will not be taxed. However, if you are above the threshold, 50% or 85% of your benefits will be taxed based on your total income.

Do Seniors Pay Social Security Income Taxes?

It depends. The short answer is that seniors are not exempt from paying Social Security income taxes simply because of their age. Whether or not they are taxed on these benefits depends on the total amount of your gross income. If they only receive Social Security payments, they probably won’t have to pay taxes on any of their benefits. However, if they receive additional income from a part-time job or a retirement account, such as a traditional IRA or 401k, they will likely owe taxes on a portion of the Social Security benefits.

If you file an individual tax return and your combined income (total of other income plus half of your SS benefits) is more than $25,000, you’ll pay taxes on 50% of your Social Security payments. If the combined earnings amount exceeds $34,000, 85% of your benefits will be taxed. Age is not a factor in determining whether these benefits will be taxed.

Who is exempt from paying social security tax?

First, let’s talk about income tax on social security benefits. People who receive Supplemental Security Insurance or SSI benefits are exempt from paying taxes on these benefits. In addition, single registrants whose income is less than $25,000 or married registrants filing jointly whose total combined income is less than $32,000 are not required to pay taxes on any part of their Social Security income.

Social security tax can also refer to withholdings from your paycheck that enter the system while you work. This tax is part of the FICA taxes. Very few people are exempt from paying these taxes. However, there are some exceptions. State and local employees who are included in a public pension plan are not required to pay the tax because that would essentially mean a double dip. Also, foreign government officials working in the United States are not required to pay into the system. In exceptional cases, people can request a religious exemption from paying the tax, although strict requirements are needed to benefit from this exemption.

Does Social Security income count as income?

Yes, your Social Security earnings count as income for federal income tax purposes. How much of that income is taxable depends on your total income and your calculated combined income. Even if it counts as income, you are not required to pay any tax on that income if you earn less than $25,000 a year. With average Social Security payments of about $18,000 per year, people whose only source of income is Social Security would not be required to pay any taxes on their benefits.

Married couples filing jointly have a slightly higher threshold of $32,000 before having to pay taxes on their Social Security benefits. However, if you have additional sources of income, such as private retirement benefits or even a job, this will likely increase the amount of your income enough to require you to pay taxes on some of your Social Security income. At most, you will be required to pay taxes on only 85% of your SS income. Therefore, there will always be a 15% portion of social security benefits that are considered tax-free.

How are social security benefits taxed?

Your Social Security benefits are federally taxed as income, just like income from retirement accounts or from a job. You will only pay taxes on 85% of your profits. You may not have to pay taxes on any of your benefits if your total income is below the annual threshold.

You may also have to pay state income taxes on your benefits if you live in a state that taxes them. Most states don’t collect taxes on your benefits, but there are a few states that do. Some of them follow the same guidelines as the IRS, while others have their own rules.

What happens to social security benefits when you die?

This is a complicated question that can have many answers depending on your specific situation. We’ll try to cover the basics, but you should always consult a social security expert for help. Generally, Social Security benefits stop when you die. They are designed to last until the end of a person’s life, so when that person dies, the payments stop. However, there are exceptions to this rule.

Surviving spouses may continue to receive benefits in some cases, especially if they are caring for a minor child of the decedent. A widow or widower of a benefit recipient can receive the full benefit upon reaching full retirement age. You can also receive full benefits at any age if you are not remarried and are caring for a child of the deceased who is under the age of 16.

Children of the decedent may also receive survivor benefits if they are unmarried and under the age of 18. In some rare circumstances, divorced spouses may also receive survivor benefits, but you should consult a Social Security representative to discuss your specific situation.

Are social security benefits taxed after age 66?

Yes, Social Security benefits can still be taxed after age 66. If any of your benefits will be taxed by the IRS it is not your age. Depends on marital status and total income. If your income exceeds the limit, you will have to pay up to 85% of the amount of your benefit.

What is the difference between tax free income and taxable income?

As the names suggest, tax free income is exempt from income tax. So what is taxable income? Taxable income is considered to be the amount of income you have for which you are responsible for paying income taxes. You may still need to show tax-free income on your tax return, even if you don’t have to pay any tax. Part of the tax-free income is still used to calculate total income for the purpose of calculating combined social security income. Taxable income is any income that is not exempt from IRS tax payments.

What is the taxable income limit for social security?

We have already learned the answer to the question, “Do you pay social security taxes?” So what is the highest amount you will pay taxes on? The taxable income limit for social security is 85%. Even at the highest income level, no more than 85% of your Social Security income will be considered taxable income. Therefore, you will always have at least 15% of your profits on which you will not have to pay taxes.