Do you pay taxes on Social Security?

You could consider your Social Security benefits being taxed both at federal and state levels. The level of Social Security benefits that may have to be paid taxes on may amount to as high as 85% of your Social Security income, depending on the extent of your income and filing status. This does not mean you will pay 85% of your Social Security income in taxes. In other words, up to 85% of your receipts shall count as taxable income.

Here you will learn how federal and state taxes on Social Security benefits work. Finally, we cover how to minimize taxability on your benefits and the circumstances under which Social Security recipients must file a tax return.

How Social Security is taxed

The Social Security Administration says that about 40% of Social Security recipients have to pay federal income taxes on their benefits. In contrast to income tax brackets, Social Security tax rates and brackets have not changed since 1993.
Federal Taxes on Social Security Benefits
The following is the tax on Social Security, which varies based on the type of income and filing status:

If you are married, filing separately, you are likely to have to pay tax on your benefits. However, Social Security does not count all of your income when figuring out your payments. Social Security calculates your provisional income to determine how much of your payment will be taxable. Provisional income is also known as combined income. The following formula is used to calculate your provisional income.

Corrected gross income + tax-exempt interest income + half of your Social Security = provisional income.

Details about provisional income:

Adjusted gross income (AGI): Wages, pension income, investment income, and any withdrawals from pre-tax retirement accounts.
Tax-exempt interest income: Generally, this is interest income on municipal bonds. This income is subject to state and local taxes but is tax-exempt at the federal level.
Half of Social Security benefits: 50% of your Social Security benefits included in provisional income.

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Example:

Let’s say you are a single filer and receive the average Social Security retirement benefit through January 2024, which is $1,906 a month. This equates to $22,872 annually. If Social Security is your only source of income, in that case you won’t have to pay any taxes on your benefits, and you may not even need to file a tax return.

Now, you get the same average benefit. In addition to that, you get $10,000 in pension and withdraw $8,000 from 401(k). You also collect $2,000 in municipal bond interest. Your total income would be added up as follows:

Increased gross income: $18,000 (pension income of $10,000 plus 401(k) income of $8,000)
Tax-free interest income: $2,000
50% of Social Security: $11,436

Hence, your provisional total income will be $31,436. Also, only 50 percent of the benefits may be subjected to tax; in other words, you cannot pay taxes up to 50 percent of the benefits. Depending on the new 2023 tax brackets, that tax rate at which the final dollar in income is collected can be nothing but 12%.

State taxes on Social Security benefits

Most states don’t tax Social Security income or don’t have a state income tax. But if you live in one of these, there may be a state tax on your Social Security benefits in 2023 (which takes effect if you file on April 15, 2024).

Colorado
Connecticut
Kansas
Minnesota
Missouri
Montana
Nebraska
New Mexico
Rhode Island
Utah
Vermont
West Virginia

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What is the Social Security Tax Torpedo?

The Social Security tax torpedo is the situation where increased income boosts up your tax rates because a higher percentage of your Social Security check becomes taxable. For instance, if an individual claims provisional income of $34,000, his taxable income will increase by $1.85. In reality, this effect is restricted for those with more substantial incomes because only up to 85% of benefits are taxable.

Planning for taxes on Social Security

Tax planning beforehand is important for retirement. Some of the best strategies include saving in Roth accounts and delaying one’s Social Security benefits.

How Social Security recipients should file taxes

If you receive Social Security, you’ll receive a tax form SSA-1099 that outlines your full benefits. If you didn’t get it or lost it, you can log in to your “my Social Security” account and click “Replace Your Tax Form SSA-1099/SSA-1042S.”

In general, when your income is more than your standard deduction, based on your age and your filing status, you will need to file a tax return.

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FAQs

Q.How can I avoid taxes on my Social Security benefits?

A.You can minimize taxes by saving in Roth accounts, delaying your benefits, or managing your other income sources to stay below the taxable income thresholds.

Q.Do state taxes apply to Social Security benefits?

A.It depends on the state you live in. Some states tax Social Security benefits, while others exempt them or provide partial exemptions.