Social security income is taxed differently than the income you may have earned during your career.
Whether you pay income tax on social security depends on your other income.
The majority of Americans who receive social security benefits pay income tax on up to half or even 85% of this money, since the thresholds for tax are very low.
This doesn’t mean that you pay 85% of your benefits back to the government in taxes; rather that you would include 85% of your social security benefits with your income that is subject to your regular tax rates.
How Social Security Benefits Are Taxed
To determine how much of your benefits are taxed:
- First determine your other income, including certain items otherwise excluded for tax purposes such as tax-exempt interest.
- Add the income of your spouse, if you file jointly.
- Add half of the Social Security benefits you and your spouse received during the year.
The amount you calculate is your total income, plus half of your benefits.
Now apply the following rules:
- If your income plus half your benefits is not above $32,000 ($25,000 for single taxpayers), none of your benefits are taxed.
- If your income plus half your benefits exceeds $32,000 but is not more than $44,000, you will be taxed on (1) one half of the excess over $32,000, or (2) one half of the benefits, whichever one is lower.
- If your income plus half your benefits exceeds $44,000 ($34,000 for single taxpayers), the computation in many cases grows far more complex. Generally, if you fall into this category, 85% of your Social Security benefits will be taxed.
Examples of Social Security Benefits Taxation
Sharon and Dave—Married
- $20,000 in taxable dividends
- $2,400 in tax-exempt interest
- $21,000 in combined Social Security benefits
Their income plus half their benefits is $32,900.
($20,000 + $2,400 + 1/2 of $21,000)
They must include $450 of the benefits in gross income.
($32,900 − $32,000 = $900 / 2)
Mary and Fred—Married
- $33,500 in taxable dividends
- $4,000 in tax-exempt interest
- $5,000 in combined social security benefits
Their income plus half their benefits is $40,000.
($33,500 + $4,000 + 1/2 of $5,000)
This is due to selecting the lower number when over the threshold of $32,000.
- 1/2 the $5,000 of benefits is $2,500
- 1/2 of the excess over the $32,000 threshold is $4000 (1/2 ($40,000 − $32,000)
Therefore, 1 is selected.
Social Security Tax Examples for Singles
If your income plus half your benefits exceeds $25,000 but is not more than $34,000, you will be taxed on (1) one half of the excess over $25,000, or (2) one half of the benefits, whichever is lower.
Judy
- $20,000 in taxable dividends
- $2,400 in tax-exempt interest
- $9,000 in Social Security benefits
Judy’s income plus half of her benefits is $26,900
($20,000 plus $2,400 plus 1/2 of $9,000).
Judy must include $950 of the benefits in gross income
(1/2 ($26,900 − $25,000)).
Teresa
- $27,000 in taxable income
- $1,500 in tax-exempt interest
- $3,000 in Social Security benefits
Teresa’s income plus half her benefits is $30,000.
($27,000 + $1,500 + 1/2 of $3,000)
Teresa would include $1,500 of the benefits in income because she would select the lower number of the two below:
- 1/2 ($30,000 − $25,000) = $2,500
- 1/2 the $3,000 of benefits ($1,500)
The Tax Cost of Income Increases
If you aren’t paying tax on your Social Security benefits now because your income is below the threshold, or are paying tax on only 50% of those benefits, an unplanned increase in your income can have a triple tax cost.
Triple Tax Cost
If you have an unplanned increase in your income, this is how it can cost you.
- Pay tax on the additional income
- Pay tax on (or on more of ) your Social Security benefits (since the higher your income, the more of your Social Security benefits that are taxed)
- Pay more if you get pushed into a higher marginal tax bracket
For example, this situation might arise when you receive a large distribution from a retirement plan (such as an IRA) during the year or have large capital gains.
How to Avoid Paying More Tax on Social Security Income
Careful planning might be able to help you avoid paying triple tax.
Some Ways to Lower Your Tax Bill
When you have an unexpected increase in income, consider:
- It may be possible to spread the additional income over more than one year
- Liquidate assets other than an IRA account, such as stock showing only a small gain or stock whose gain can be offset by a capital loss on other shares.
If you should need a large amount of cash for a specific purpose, don’t liquidate any assets without first reaching out for accounting advice. We can help you determine what your additional tax cost will be.
Helpful tip: If you know that your social security benefits will be taxed, you can arrange to have the tax withheld from the payments by filing a Form W-4V. Otherwise, you may have to make estimated tax payments.
More Information
If you have questions, contact us to discuss your situation.
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Patty Ward
Patty has more than 30 years experience in public accounting. She reviews tax returns for high net worth clients, focusing on individual tax work. Her mission is to provide high level service to her clients, reducing their tax burdens, keeping them informed and instilling confidence.
About Smith Patrick CPAs
Smith Patrick CPAs is a boutique, St. Louis-based, CPA firm dedicated to providing personal guidance on taxes, investment advice and financial service to forward-thinking businesses and financially active individuals. For over 30 years, our firm has focused on providing excellent service to business owners and high-net worth families across the country. Investment Advisory Services are offered through Wealth Management, LLC, a Registered Investment Advisor.