Income

Is Social Security Taxable?

Kristin Hitchcock

Published: April 19, 2024 1:50 pm

For many Americans, Social Security is a cornerstone of their retirement. It’s designed to provide a steady stream for retirees. In fact, it is the largest source of income for most of those who receive it. 

However, there’s a common misconception that Social Security benefits are always tax-free. In reality, a portion of your benefits may be subject to federal taxes, depending on your overall income. 

Like many federal taxes, Social Security is taxed depending on your income threshold. Understanding these implications is important for making financially sound retirement decisions. 

What Are Income Thresholds?

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Many people assume that Social Security is tax-free. While this is true for most retirees, those with higher incomes may be surprised to learn that a portion of their benefit may be taxed. It’s your overall income level that matters. This factor is called “combined income” by the Internal Revenue Service (IRS).

This combined income figure isn’t simply your benefit amount, and it doesn’t also include all your Social Security benefits. To determine your combined income, the IRS adds half of your total Social Security benefits to your other income sources (wages, pensions, interest, rent income, etc.). Even factors like tax-exempt interest are added, so be sure you’re considering all your income. 

After figuring out your combined income, the IRS compares your income to specific thresholds. If you exceed these thresholds, a certain amount of your Social Security benefits becomes taxable. 

If you haven’t retired and need to estimate your Social Security benefit, we have an article on how much Social Security you can expect. You may also want to get a better idea of how Social Security benefits work. 

Specific Tax Brackets and Thresholds

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There are different income thresholds depending on your tax filing status. These change every year. Here are the most recent thresholds:

• Single filers, heads of household, and qualifying widows with dependents: If your combined income is below $25,000, your Social Security benefits are not taxed. However, once you make over this amount, a portion will be. 
• Married couples filing jointly: The combined income threshold for married couples filing jointly is higher at $32,000. If your income is below this, you won’t be taxed. However, if it is above it, expect to pay something in taxes.
• Married couples filing separately: Generally, married couples filing separately is a less favorable situation. Their income threshold is much lower, meaning a larger portion of their Social Security benefits might be taxed. Unless you have a specific reason not to, we recommend filing jointly.

When you reach one of these income thresholds, it doesn’t mean all of your Social Security income will be taxed. Instead, only a portion becomes taxable based on a sliding scale. Only some benefits become taxable if your income exceeds the income threshold. The more your combined income rises, the larger the portion will be taxed. 

For instance, someone who makes only a small amount above the threshold may only have 5% of their Social Security income taxed. 

In the worst-case scenario, up to 85% of your Social Security benefits can be taxed. 

Your income may vary from year to year, varying the amount of tax you should expect to pay. It’s important to stay on top of your income to predict how much tax you can expect to pay. 

Planning for Taxes on Your Social Security

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Now that we’ve gone over income thresholds, it’s time to look at how you can actually use this information to navigate Social Security taxes. 

1. Estimate Tax Liability

First, you must estimate how much your Social Security benefit will be taxed. This step helps you plan your budget and be prepared when tax season rolls around. There are several ways you can go about this:

• Online Tools: The IRS website offers resources and tools to help estimate your tax liability. However, these are estimates. Your actual liability may vary. That said, some of these tools get pretty close!
• Tax Professionals: If your situation is complicated or you don’t want to rely solely on online tools, a tax professional can be very helpful. They can analyze your specific finances and provide a more tailored estimate. They may even be able to help you adjust your situation so that you owe less in taxes.

No matter how you choose to do it, you should have a clear understanding of how much you expect to owe in taxes. This estimate helps you determine how much you may need to save for retirement, too. While waiting longer does help increase your monthly benefit, we don’t recommend maximizing your benefit by waiting until you are 70 to retire, partially due to the increased taxes. 

2. Tax Withholding Options

Next, you’ll need to manage your tax obligations if you have them. You have several options, including having federal tax income withheld directly from your monthly Social Security payments. 

This option has several benefits. For instance, it allows you to avoid a potentially large tax bill at the end of your year. Essentially, monthly withholdings spread your tax burdens throughout the year, making them easier to manage. 

Plus, you’ll also avoid having the stress of getting a bigger tax bill than you can afford. You won’t have to deal with stressing about putting enough money aside to pay taxes at the end of the year. 

There are different withholding options, as well. You want to withhold just enough to pay your taxes. Withholding too much can leave you with smaller monthly payments, potentially necessitating a tax refund later. Conversely, withholding too little might result in owing a significant sum come tax season.

When deciding your withholding rate, you should use your estimated tax liability. Preferably, you should withhold just enough to cover your tax liability over twelve months. You can submit a form to withhold taxes from your monthly benefits on the SSA website. 

Of course, withholding taxes isn’t the only thing you must do to plan for retirement properly. Check our Social Security hub for more planning strategies.