Is Social Security Taxable?
Is Social Security taxable? In most cases, yes; though the answer isn't as straightforward as you might think.
For many Americans, Social Security retirement benefits are subject to federal income taxes depending on other income. That means that if your total income—including Social Security and other sources—is above certain thresholds, up to 50% (or even 85%!) of your Social Security benefits is subject to tax. Those with a lower income, however, may not pay any taxes on their SS benefits at all! While most states don’t tax Social Security, some exceptions to the rule do exist. Let's dig into the details…
How much of my Social Security income is taxable?
Consider tax requirements at both the federal and state level to calculate this. Here's how:
Federal taxes
Two primary factors determine if your Social Security benefits are taxable at the federal level:
Annual combined income: This includes your adjusted gross income, any nontaxable interest you earn, and half of your Social Security benefits. Your adjusted gross income comprises earnings from work, investment income, retirement plan withdrawals, pensions, and any other taxable income you might have.
Marital status: If you’re married, you and your spouse have higher income thresholds before you’re taxed on Social Security benefits as compared to single filers.
The portion of your Social Security benefits that’s taxable depends on these factors, but it doesn't mean you lose that same percentage to taxes. For example, if your annual Social Security benefit is $24,000 and 50% is taxable, you won't pay taxes on $12,000 of it (with 85% of your benefit taxable as the maximum, meaning 15% ($3,600) is exempt from taxes).
State taxes
While most states don’t tax Social Security income, exceptions exist whereby some in fact do this—though may offer exemptions based on either a percentage of the benefit or specific dollar amounts.
Currently, nine states tax Social Security benefits under certain conditions: Colorado, Connecticut, Kansas, Minnesota, Montana, New Mexico, Rhode Island, Utah, and Vermont. If you live in one of these locations, it's a good idea to check with your state tax agency to understand specific rules and if they apply to you.
How do I file Social Security taxes?
Paying taxes on your Social Security benefits might seem complicated, but it's an important part of managing your finances in retirement nonetheless.
Each January, you should receive a Social Security Benefit Statement (Form SSA-1099) that details the benefits you received during the previous tax year—which you must report to the IRS.
If some of your Social Security benefits are taxable, you can go ahead and file your taxes as follows:
Use the figures from your SSA-1099 form when filling out your tax return. Tax software can guide you through how to input this information, or a tax professional (e.g., tax prep services we offer through our sister company, Advisor Tax Prep) can help.
Follow the instructions on your tax return or use tax software to calculate how much tax you owe on your benefits.
You can file electronically or otherwise mail your tax forms to the IRS (noting the former method is faster and less prone to error).
Another option is to ask the Social Security Administration to withhold federal taxes from your benefit payment, completing/submitting a W-V4 Voluntary Withholding Request form to do so.
How to minimize Social Security taxes
Fortunately, you can rely on a few different strategies to reduce Social Security taxes as follows:
Use Roth accounts
Roth IRA or Roth 401(k) contributions are made with after-tax dollars. Since you pay taxes on this money before it goes into the account, you won't owe any taxes when you withdraw funds (provided certain conditions are met). This is advantageous because:
Roth IRA distributions, which are tax-free if taken after age 59½ and if you’ve owned the account for at least five years, help because these withdrawals don’t count as taxable income.
Roth distributions don’t increase tax owed on Social Security benefits as they don’t count as taxable income. In contrast, traditional IRA and 401(k) plan withdrawals are taxable and liable to increase the portion of Social Security benefits subject to taxes.
Combining both traditional and Roth retirement accounts, meanwhile, can provide flexibility in how and when you withdraw funds—helping to manage taxable income levels each year:
By managing amounts withdrawn from traditional and Roth accounts, you can keep your annual income below the thresholds that trigger higher taxes on Social Security benefits.
Think about the timing of your withdrawals (e.g., if you anticipate higher personal expenses in a given year, withdraw more from your Roth accounts to cover the corresponding cost without raising your taxable income).
Purchase a QLAC
A qualified longevity annuity contract (QLAC) is a type of deferred annuity—an insurance contract that provides investors with a stream of income during retirement—that you buy with funds (up to $200,000, as of 2024) from a qualified retirement plan such as an IRA or 401(k).
These QLAC payments not only help ensure you have income later in retirement when other funds are perhaps depleted but also minimize your exposure to RMDs (required minimum distributions) required by qualified plans such as 401(k)s and traditional IRAs; in the absence of a QLAC, you’d need to withdraw money from these accounts beginning at age 73 (75 as of 2033). This annuity can thus help you control your taxable income, potentially lowering taxes on your Social Security benefits.
Address taxable income before you retire
If you're nearing retirement, consider increasing your taxable income before you receive Social Security benefits as a practical approach—especially during your peak earning years. Here's how to apply this strategy:
You can withdraw money from your retirement accounts (e.g., IRAs and 401(k)s) upon turning 59½ without facing early withdrawal penalties. Although these withdrawals are still subject to income tax, strategically planning them in this way timing-wise can lower your overall tax burden.
Overall, this approach reduces the amount you need to withdraw from retirement accounts after Social Security benefits kick in: keeping this lower post-retirement to possibly pay less tax on your benefits, as Social Security taxation is based on your combined income. Also remember that you must begin taking required minimum distributions (RMDs) from your retirement accounts at age 73; taking larger distributions before this can also help manage and potentially reduce tax impacts when RMDs begin, which are mandatory and can push you into a higher tax bracket along with your Social Security income.
In sum: are Social Security benefits taxable?
While Social Security benefits are in fact taxable, you can employ various strategies to minimize (or even avoid) the corresponding tax burden.
Need help with retirement finance planning or tax strategies? Book a complimentary, no-obligation discovery call with us today.
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Vision Retirement is an independent registered advisor (RIA) firm headquartered in Ridgewood, New Jersey. Launched in 2006 to better help people prepare for retirement and feel more confident in their decision-making, our firm’s mission is to provide clients with clarity and guidance so they can enjoy a comfortable and stress-free retirement. To schedule a no-obligation consultation with one of our financial advisors, please click here.
Disclosures:
This document is a summary only and is not intended to provide specific tax advice or recommendations for any individual or business.
Fixed and Variable annuities are suitable for long-term investing, such as retirement investing. Gains from tax-deferred investments are taxable as ordinary income upon withdrawal. Withdrawals made prior to age 59 1⁄2 are subject to a 10% IRS penalty tax and surrender charges may apply. Variable annuities are subject to market risk and may lose value. Riders are additional guarantee options that are available to an annuity or life insurance contract holder. While some riders are part of an existing contract, many others may carry additional fees, charges and restrictions, and the policy holder should review their contract carefully before purchasing. All guarantees are based on the claims paying ability of the issuing insurance company.