Social Security is a major source of income for millions of retirees in the United States. But many people are surprised to learn that a significant portion of their benefits may be taxed—meaning not all of it truly ends up in your pocket.
In this article, we’ll break down how Social Security is taxed, who is affected, and what you can do to keep more of your benefits.
Are Social Security Benefits Taxable?
Yes, Social Security benefits can be taxable at the federal level, and in some states too. Whether or not you pay taxes—and how much—depends on your combined income.
What Counts as “Combined Income”?
The IRS calculates combined income using this formula:
- Adjusted Gross Income (AGI)
- Plus: Non-taxable interest (such as municipal bond interest)
- Plus: 50% of your annual Social Security benefits
Based on this number, your benefits may be partially taxed.
How Much of Your Benefits Will Be Taxed?
The percentage of your Social Security that is taxable depends on your filing status and your combined income.
For Single Filers:
If your income is over $34,000, up to 85% may be taxable.
If your combined income is between $25,000 and $34,000, up to 50% of your benefits may be taxable.
For Married Filing Jointly:
- If your combined income is between $32,000 and $44,000, up to 50% may be taxable.
- If your income is over $44,000, up to 85% may be taxable.
These thresholds were set in the 1980s and have not been adjusted for inflation. As a result, more retirees are being taxed each year simply because their incomes rise with inflation.
Do States Tax Social Security Benefits?
In addition to federal taxes, 13 states also tax Social Security income to some degree. These include:
- Colorado
- Connecticut
- Kansas
- Minnesota
- Missouri
- Montana
- Nebraska
- New Mexico
- Rhode Island
- Utah
- Vermont
- West Virginia
Each state has different rules and exemptions, so it’s important to check your state’s current tax policy.
How to Reduce Taxes on Your Social Security
Here are four effective strategies that can help you minimize the taxes you pay on your benefits:
1. Limit Withdrawals from Retirement Accounts
Large withdrawals from a traditional IRA or 401(k) can push your combined income into a higher bracket, triggering Social Security taxes.
2. Use Roth Accounts
Withdrawals from Roth IRAs and Roth 401(k)s are not included in your combined income. Using these accounts in retirement can help reduce the portion of your Social Security that is taxable.
3. Move to a Tax-Friendly State
If you’re open to relocating, consider a state that does not tax Social Security benefits or has favorable income tax laws for retirees.
4. Delay Taking Social Security
Waiting until age 70 to begin collecting benefits can increase your monthly payments and reduce the number of years your benefits are taxed.
So, How Much Is Really Yours?
At most, 85% of your Social Security benefits can be taxed, which means at least 15% is always tax-free. But the actual amount you’ll owe depends on your income and where you live.
With smart planning, you may be able to reduce or even eliminate taxes on your benefits.
Final Thoughts
Social Security is a vital source of retirement income, but not all of it is tax-free. Understanding the rules—and how they apply to your situation—can help you make informed decisions and protect more of your money.
Planning ahead is key. Speak with a financial planner or tax advisor to develop a retirement income strategy that keeps more of your Social Security where it belongs: with you.
FAQ’s
1. Will all my Social Security benefits be taxed?
No, only up to 85% of your benefits may be taxed depending on your income. The rest is tax-free.
2. How do I know if my Social Security is taxable?
Your Social Security benefits are taxable if your combined income (including half of your benefits) exceeds certain thresholds. For single filers, this starts at $25,000; for married couples, it starts at $32,000.
3. Can I avoid taxes on Social Security benefits?
Yes, you can minimize taxes by controlling other income sources or using tax-deferred accounts like Roth IRAs, which do not count toward your combined income.