Is your Social Security income taxable? The short answer is “Maybe.”
For many retirees, Social Security benefits are a completely tax-free source of retirement income. But in some cases, a portion of Social Security income can be considered taxable income. Here’s a rundown of why many retirees won’t pay any Social Security tax, what you should expect if you’re a high earner, how Social Security is taxed on the state level, and what happens to the money if you have to pay taxes on your benefits.
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Many retirees won’t pay any taxes on Social Security income
Here’s an important fact to know. If Social Security is your main source of retirement income, it is unlikely you’ll pay any taxes on it.
The IRS uses a figure called combined income to determine whether your Social Security benefits are taxable. Your combined income is your adjusted gross income, any nontaxable interest income you receive, and half of your Social Security benefits.
In order for any of your Social Security benefits to be taxable, your combined income must be greater than $34,000 for joint tax filers, or $25,000 for those who use the single filing status.
Consider this example. Let’s say that you’re retired, and that you and your spouse each receive $2,500 per month from Social Security, which is well above the average American’s Social Security benefit. This would translate to a total of $60,000 per year in Social Security income.
However, because the combined income formula only includes half of your Social Security, this would only count as $30,000 — $4,000 below the threshold where married couples’ benefits are subject to any taxation at all.
The key takeaway is that if Social Security makes up most or all of your income in retirement, it is highly unlikely that you’ll pay any tax on it, unless you and your spouse were both very high earners throughout your careers.
Nobody pays taxes on all of their Social Security income
Even if you have enough retirement income that your Social Security benefits can be considered taxable, it’s important to realize that nobody pays taxes on all of their Social Security. Specifically, there are two rules that apply to different income levels:
- Retirees with combined income between $25,000 and $34,000 (single) or $32,000 and $44,000 (joint) can be taxed on up to 50% of their Social Security income.
- Retirees with combined income over $34,000 (single) or $44,000 (joint) can be taxed on up to 85% of Social Security benefits.
Think about this for a second. Let’s say that you bring in $30,000 per year from Social Security. Even if you have a million-dollar income stream from retirement accounts, businesses you own, etc., the most that can be considered as taxable income is 85% of this, or $25,500.
Most states don’t tax Social Security income at all
So far, everything discussed here applies to federal income tax on Social Security benefits. It’s possible that you could have to pay state taxes as well, depending on where you live. But for most Americans, that isn’t the case.
In fact, only a dozen states tax Social Security benefits at all. Two of them are planning to stop taxing Social Security within the next two years. And of those that do tax Social Security, most have rules that are more favorable than on the federal level. For example, Colorado taxes Social Security benefits, but only for certain beneficiaries under age 65. Once you reach that age, your Social Security is completely tax-free on the state level.
Social Security taxes help pay for benefits
While nobody likes paying taxes, one important fact to know is that when Social Security benefits are taxed, the money doesn’t just go into the general budget of the United States. Taxes on benefits go directly back into the Social Security program to provide extra funding and sustainability to the program. In fact, of the $1.06 trillion Social Security brought in during 2022, taxes of benefits of high earners contributed about $47 billion — a significant source of income.
