Is Social Security Taxable?

Are you starting to plan for retirement? Whether you’re a few years away from throwing in the towel or amid your retirement, you may be wondering, is Social Security taxable. Social Security is one of the most critical components of retirement planning, impacting your monthly cash flow and your tax return.

Unfortunately, there’s no one-size-fits-all answer on the taxability of Social Security, as the taxation depends on your specific situation. However, there are some factors to be aware of when it comes to evaluating your situation. In this article, we’ll cover everything you need to know about Social Security taxation, helping you properly plan for retirement and tax time.

How Are Social Security Benefits Determined

Social Security benefits provide a source of income for individuals during retirement. This can include both monthly payments and discounted health insurance. Americans over the age of 62 or those that are disabled are eligible for Social Security benefits.

The amount you are eligible for depends on the income you earned during your work lifetime. Each year you hold a job and pay Social Security tax, you can earn up to four work credits. Once you reach 40 credits, you are eligible for Social Security benefits.

However, the number of credits you have does not determine your monthly benefits. Instead, the average of your earnings over your working years is used to calculate your monthly payments.

How Much Will My Social Security Be Taxed

Social Security benefits can become taxable if you generate other income during retirement, such as through investment accounts, pensions, and retirement accounts. Up to 85% of your Social Security income can be taxable if you exceed specific thresholds, which we will discuss later on.

The Internal Revenue Service (IRS) plays a role in determining the taxation of your Social Security income. Each year, the IRS will adjust the thresholds for inflation. In addition, taxes on your Social Security income won’t be determined until you prepare your individual income tax return, making tax planning crucial.

The Social Security Administration (SSA) and the IRS determine the taxation of benefits based on your combined income. Your combined income is the sum of your adjusted gross income, nontaxable interest, and half of your Social Security income.

Example of How Someone’s Social Security Is Taxed

Let’s say that your adjusted gross income is $50,000, you earned $5,000 in nontaxable income and received $10,000 in Social Security income. Your combined income would be $60,000, which is found by adding your adjusted gross income of $50,000, your nontaxable income of $5,000, and half of your Social Security income of $5,000.

When it comes to determining the taxation of your Social Security benefits, your filing status and combined income will be influential factors. If you file as a single taxpayer and your combined income is between $25,000 and $34,000, you might have to pay taxes on 50% of your Social Security income. Single taxpayers with a combined income over $34,000 will be subject to taxes on 85% of their Social Security income.

These thresholds are adjusted for married filing joint taxpayers. Married filing joint taxpayers that have a combined income between $32,000 and $44,000 can pay up to 50% taxes on Social Security income. A combined income over $44,000 can result in 85% of Social Security income being taxable.

How to Minimize Taxes on Your Social Security

Minimizing taxes on your Social Security income is beneficial to keep more money in your pocket when tax time rolls around. For one, understand your different income streams. Since taxation of Social Security income is based on your adjusted gross income and nontaxable income, reworking when income is received and from which sources can help you reduce your taxes.

Remember, certain types of retirement accounts have tax-free distributions, like a Roth IRA. When you take a distribution from your Roth IRA account, the income does not count toward your tax threshold for calculating Social Security income taxation. Roth IRA conversions and contributions can be a great way to save for retirement and minimize your Social Security taxes.

Similarly, timing your Social Security benefits is another strategy to lower your taxes. Carefully planning when you enroll in benefits and taking advantage of tax-advantaged programs, like healthcare benefits, are viable strategies to lower your taxes.

Is Social Security Taxable in Every State

The taxation of Social Security benefits varies by state. Some states follow IRS guidelines, while others deem Social Security benefits as nontaxable income. In 2024, only nine states have provisions in place that tax Social Security benefits, including Colorado, Connecticut, Kansas, Minnesota, Montana, New Mexico, Rhode Island, Utah, and Vermont.

The other 41 states treat Social Security income as nontaxable. Most states that do tax Social Security benefits have high thresholds before an income tax comes into play. For example, single taxpayers in Montana won’t be taxed until their adjusted gross income exceeds $100,000.

Other states, like Utah, tax benefits once adjusted gross income exceeds $45,000 for single taxpayers. Working with an accountant and financial planner familiar with your home state is the best way to determine any potential tax consequences from Social Security benefits.

How to Plan for a Tax-Efficient Retirement

When taking steps toward a tax-efficient retirement, it’s important to have a comprehensive retirement plan. Tax planning not only helps you avoid running out of cash during retirement, but it also allows you to save money on your tax bill each year. Basing your retirement on your gross Social Security income increases your risk of not being able to pay for an unexpected tax bill or afford the rising cost of living.

Having a comprehensive retirement plan reduces these risks, allowing you to fully enjoy retirement and your Social Security benefits. When it comes to incorporating Social Security taxation into your retirement plan, be aware of what other income streams you have that factor into your combined income. Then, work with a qualified financial planner to time payments and the type of income you receive to minimize your tax bill.

Conclusion

Social Security income can be taxable depending on your state, combined income, and filing status. Regardless of where you’re at on the retirement scale, it’s important to consult with a financial planner to optimize your retirement strategy. Reach out to a team member today to schedule your free consultation.