Social Security Benefits: When Federal Taxes Take a Bite

I understand how worrying it can be to think about taxes taking away from your hard-earned Social Security benefits. Many of us count on these Social Security payments for our retirement security, and the thought of losing some to taxes can feel overwhelming. Please know you’re not alone in these concerns about Social Security taxation.

First, let me offer some reassurance. If Social Security is your only income source in retirement, you likely won’t need to worry about federal taxes on your benefits. That’s comforting news for many retirees. However, if you have additional income from sources like part-time work, pensions, traditional retirement accounts, or rental properties, some portion of your Social Security benefits might be taxable.

There is a silver lining, though. At least 15% of your benefits will always remain tax-free, which is actually better protection than most other retirement income sources receive.

How to Know if Your Social Security Benefits Are Taxable

Generally, Social Security retirement, survivor, and disability benefits may be subject to taxation. This also applies to Tier 1 railroad retirement benefits.

However, you won’t owe any federal income tax on your Social Security if your “combined income” falls below certain thresholds. It’s also worth noting that:

• Supplemental Security Income (SSI) payments are never taxable
• Disability payments received for injuries resulting directly from terrorist attacks aren’t taxed

Understanding Your “Provisional Income” for Social Security Taxation

To determine if your benefits might be taxed, you’ll need to calculate what’s called your “provisional income” (sometimes called combined income).

For most of us, provisional income equals:

50% of your Social Security benefits + Modified Adjusted Gross Income (MAGI) + Tax-Exempt Interest

If you’re married filing jointly, remember to include amounts for both you and your spouse.

If your provisional income stays below certain levels, you won’t pay any tax on your Social Security benefits. However, if you have other income sources beyond Social Security, you may exceed these thresholds.

Breaking Down the Calculation

Half of Your Social Security Benefits

You can find this amount in Box 5 on your Social Security benefit statement (Form SSA-1099). Married couples filing jointly should add both spouses’ benefits together.

Modified Adjusted Gross Income (MAGI)

This is essentially your adjusted gross income (tax return Line 11 on your 2024 tax return), with a few adjustments for certain deductions.

Tax-Exempt Interest

This includes interest from investments like municipal bonds and appears on Line 2a of your federal tax return.

Understanding the Social Security Tax Thresholds

When You Pay No Tax on Benefits

You won’t pay any federal taxes on your Social Security if:

• You’re single, head of household, or a surviving spouse with provisional income of $25,000 or less
• You’re married filing jointly with provisional income of $32,000 or less
• You’re married filing separately but lived apart from your spouse all year, with provisional income of $25,000 or less

When Up to 50% of Benefits May Be Taxed

You’ll pay tax on up to half of your Social Security benefits if:

• You’re single, head of household, or a surviving spouse with provisional income between $25,001 and $34,000
• You’re married filing jointly with provisional income between $32,001 and $44,000
• You’re married filing separately, lived apart from your spouse all year, with provisional income between $25,001 and $34,000

When Up to 85% of Benefits May Be Taxed

You’ll pay tax on up to 85% of your Social Security benefits if:

• You’re single, head of household, or a surviving spouse with provisional income above $34,000
• You’re married filing jointly with provisional income above $44,000
• You’re married filing separately with provisional income above certain thresholds

Remember, these Social Security tax thresholds haven’t been adjusted for inflation since they were established, which means more retirees find themselves paying taxes on their benefits each year. I know this can feel frustrating, but understanding these rules can help you better prepare for your financial future.