A Quick Guide to Social Security Taxes in Retirement
When calculating individual benefits, the Social Security Administration draws on up to 35 years of personal earnings history. To receive Social Security benefits in the first place, you have to work at least 10 years. Therefore, it’s not that surprising that many people see their benefits as something they have earned.
Yet each year, Uncle Sam collects a share of people’s benefits through income taxes. You may have to pay taxes on as much as 50%-85% of your benefits, depending on how much income you report to the IRS.
Why are Social Security Benefits Taxable?
Decades ago, Social Security benefits used to be tax-free. Then in 1984, the U.S. government had its first Social Security funding crisis. Congress passed legislation to shore up the program and made SS benefits taxable in certain cases.
Up to 50% of benefits could be taxed, but later Congress upped it to as much as 85% of benefits, with some collected revenues going toward Medicare.
As you plan and prepare for retirement, it’s important to know whether your own benefits may be taxable.
Will You Have to Pay Taxes on Social Security?
To determine whether Social Security benefits are taxable, start by calculating your provisional income. This figure consists of:
- Adjusted gross income, including wages, investment income, rental income, pension and annuity income, and other income sources besides Social Security
- 50% of your Social Security benefits
- Tax-exempt interest from municipal bonds
You may be married and file a joint return for the tax year. If that’s the case, you and your spouse must combine your incomes and your benefits to determine taxability, if any, of your combined benefits. You will need to include your spouse’s income with your own, even if your spouse didn’t earn any benefits. You can use Worksheet A from the IRS to check if your benefits might be taxable.
If you file a single or head-of-household tax return, your base amount is $25,000. This also applies for people who of qualifying widow or widower status. Should your provisional income fall below $25,000, your Social Security benefits are tax-free. For those filing a joint return, the base amount jumps to $32,000. Provisional income below that isn’t subject to income taxation.
As the chart above shows, “individual” tax filers falling between $25,000-$34,000 may pay income taxes on up to 50% of their Social Security benefits. If they exceed $34,000, up to 85% of their benefits may be taxable.
Among those with joint filings, falling between $32,000-$44,000 means up to 50% of Social Security benefits may be taxable. Should their income exceed $44,000, the taxable percentage of benefits can jump up to 85%. No matter if you hold individual or couple filing status, the rest of the benefits will remain tax-free.The actual amount that is taxed will depend on how much you get in benefits, as well as how much your income goes above the limit amounts in the chart.
Should you have to pay income taxes on benefits, you may pay quarterly estimated taxes to the IRS. Or you can choose to have taxes withheld from your benefits. If you chose to withhold taxes from benefits, file a W4-V form with the SSA for your withholding request.
See Also: 7 Fast Answers to Your Top 7 Social Security Questions.
Even if your benefits aren’t taxed at the federal level, this doesn’t include state income taxes that may apply to benefit payments. Not all states tax Social Security benefits, though.
In What States is Social Security Taxed?
In most states, Social Security benefits are tax-free. As of tax year 2021, benefits may be taxable in only 12 states, according to TheBalance. In no particular order, those states include:
- New Mexico
- Rhode Island
- West Virginia (phasing out, however)
Working Longer, Starting a New Career, or Starting a New Business
Some people opt to work longer so they can accrue more credits for Social Security and build up more savings. In other cases, retirees start “second-act” careers, or new jobs to keep themselves engaged. Still, others with an entrepreneurial bent may start new businesses or consulting ventures for social and lifestyle reasons.
While admirable milestones, they do carry potential implications for Social Security. The supplemental income you might earn from those activities can do more than just boost your income. Higher amounts of supplemental or business income can mean reduced benefit payments.
If you are already collecting Social Security payments and not yet reached Full Retirement Age, your work earnings may slash your Social Security payments.
For example, if you claimed your benefits before the year of your Full Retirement Age, one dollar in benefits is deducted for every two dollars of work earnings above a threshold of $21,240. That is the threshold limit for 2023.
Likewise, starting benefits in the year, but not the precise month of your Full Retirement Age, means one dollar in benefits from every three dollars above a threshold limit of $56,520 in 2023.
This is one of the more common retirement income planning mistakes someone can make. So, it’s important to be consider this alongside your retirement timing plans, along with other retirement goals you may have.
Can You Cut Your Tax Bite on Social Security Benefits?
Yes, these are some strategies you can follow. Staggered retirement account withdrawals can reduce the number of years your benefits are taxed, apart from fulfilling RMD obligations.
Distributions from Roth IRA accounts may bring more of your Social Security benefits into non-taxable range. Selloffs of assets can be carefully timed so you don’t push up your income.
There are also strategies using the favorable tax treatment of annuities, life insurance and guaranteed retirement products. These can be tapped as tax-efficient cash-flow sources while minimizing potential tax burdens. Be sure to confer with qualified professionals about what may be right for your situation.
As you create strategies for Social Security, retirement income, and taxes, guidance from a financial professional can make a real difference. Many financial professionals stand ready to help you at SafeMoney.com. Use our “Find a Financial Professional” section to connect with someone directly. And if you have need of a personal referral, call us at 877.476.9723.
Editor’s note: This content is meant for educational and informative purposes only. It is not intended to be tax advice, tax reduction advice, tax planning advice, or advice on Social Security. Please confer with qualified professionals in their respective fields of expertise about your personal situation. SafeMoney.com is not affiliated with nor endorsed by any government agency or organization, including the Social Security Administration.