Up to 85% of Your Social Security Checks Could Be Taxed. Here’s the Income Threshold That Triggers It
Most retirees assume their Social Security checks arrive tax-free after decades of payroll contributions, but a surprisingly easy-to-trigger income rule can send a significant portion of those benefits straight to the IRS.
This post may contain links from our sponsors and affiliates, and Flywheel Publishing may receive compensation for actions taken through them.
Most people earn Social Security benefits in retirement by working and paying taxes on their wages. There are other paths to Social Security, like spousal benefits, that do not require an earnings history. But for the most part, the way to get Social Security is by contributing enough payroll tax to qualify.
Given that, you might assume that your Social Security benefits are yours to collect tax-free once you’re old enough to claim them. But that’s not necessarily true.
You may, in fact, have to pay taxes on up to 85% of your Social Security benefits, depending on your total income picture. So it’s important to know the rules.
Why taxes on Social Security benefits exist
The taxation of Social Security benefits came about in 1983. Congress wanted Social Security benefits to align with other types of retirement income, like private pensions, that are typically subject to taxes.
Also, while Social Security gets the bulk of its revenue from payroll taxes, it also collects revenue in the form of taxed benefits. So while the fact that those taxes exist might frustrate some recipients, at least they’re helping to keep the program running.
When taxes on Social Security apply
It’s not a given that you’ll have to pay taxes on your Social Security benefits. Whether you’re subject to those taxes depends on your combined or provisional income, which is calculated as the sum of your adjusted gross income, tax-exempt interest income, and 50% of your annual Social Security benefits.
If you’re single and have a provisional income between $25,000 and $34,000, up to 50% of your Social Security benefits can be taxed. If you’re married filing jointly, a provisional income between $32,000 and $44,000 means up to 50% of your Social Security benefits may be taxed.
Once your provisional income goes above $34,000 as a single tax-filer, you could be taxed on up to 85% of your Social Security benefits. And if you’re a married couple filing jointly, you could be taxed on up to 85% of your Social Security checks once your provisional income goes above $44,000.
Of course, the frustrating thing is that these limits are extremely low and easy to trigger. And the reason is that they haven’t been updated for inflation in decades.
But that’s intentional. Lawmakers don’t want to raise the provisional income thresholds because Social Security desperately needs money to stay afloat.
How to avoid taxes on Social Security
If you don’t like the idea of paying taxes on your Social Security benefits — and who could blame you — then there are a few things you can do to potentially avoid or minimize them. First, keep your retirement savings in a Roth IRA or 401(k), since Roth withdrawals are tax-free and don’t count toward provisional income.
If you missed that boat, you can look at doing a Roth conversion ahead of claiming Social Security. That could allow you to take withdrawals without raising your provisional income.
However, Roth conversions are a taxable event, so you’ll need to be careful going about them. You don’t want to trigger an enormous tax bill in the course of moving your money into a Roth IRA.
Another thing you can do is keep your traditional IRA or 401(k) withdrawals to a minimum if you’re not old enough to be subject to required minimum distributions (RMDs). Once RMDs begin, you won’t have as much control over the amount of money you have to withdraw from your savings.
But if you were born prior to 1960, RMDs don’t begin until age 73. And you can start collecting Social Security as early as age 62. So during that window, being strategic with your withdrawals could help.
Taxes on Social Security benefits are a frustrating thing given how those benefits are earned. But the rules are unlikely to change anytime soon, so your best bet is to understand them and find ways to get out of paying those taxes.
Contact [email protected] for any questions or corrections.
Maurie Backman has more than a decade of experience writing about financial topics, including retirement, investing, Social Security, and real estate. Her work has appeared on sites that include The Motley Fool, USA Today, U.S. News & World Report, The Washington Post, and Kiplinger.
Prior to becoming a full-time financial writer, Maurie worked in the financial industry trading distressed debt. She then changed course and spent a few years designing electronic toys. After a stint in content marketing and UX, she shifted back into writing and has since covered everything from the housing market to estate planning to Medicare.
When she's not busy writing, Maurie can be found hiking, walking her dogs, driving her kids to their various sports practices and games, and curling up with a good book. She cooks on occasion and bakes way too often.
