5 Things Retirees Need to Know About Income Taxes on Social Security Benefits
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You work for decades, regularly paying taxes to help fund Social Security. Then you retire at the end of a long career and begin to get back the money you put in all those years. No more taxes, right?
Many Americans might think that. However, the reality is more complicated. Here are five things retirees need to know about income taxes on Social Security benefits.
Image source: Getty Images.
1. You may have to pay federal income taxes on part of your Social Security benefits
It’s possible that you won’t have to pay any federal income taxes on your Social Security benefits. Around 60% of retirees don’t have to, according to the Social Security Administration (SSA). However, that means that roughly 40% will have to pay federal income taxes.
The following table shows how the amount of federal taxes you’ll have to pay, if any, depends on how you file your taxes and how much income you make:
| Federal Tax Filing Status | Combined Income | Percentage of Benefits Taxed |
|---|---|---|
| Individual | Under $25,000 | 0% |
| $25,000 to $34,000 | Up to 50% | |
| Over $34,000 | Up to 85% | |
| Married filing jointly | Under $32,000 | 0% |
| $32,000 to $44,000 | Up to 50% | |
| Over $44,000 | Up to 85% | |
| Married filing separately | Any | Up to 85% |
Data source: Social Security Administration. Table by author.
Note that combined income is the sum of your adjusted gross income (AGI) plus any nontaxable interest plus one-half of your Social Security benefits.
2. There’s an easy way to estimate how much you owe in federal taxes
If you’re wondering how much you might have to pay in federal income taxes on your Social Security benefits, there’s an easy way to calculate an estimate. Just use the Internal Revenue Service’s online tax withholding estimator.
3. You can have federal taxes withheld from your benefits
It can be painful to have to pay a huge tax bill at the end of the year. To avoid this, you can choose to have federal income taxes withheld from your Social Security benefits. All you need to do is download Form W-4 V: Voluntary Withholding Request from SSA’s website, complete it, and then either mail or fax it to your nearest Social Security office.
4. You may also have to pay state income taxes on your benefits
Some Americans won’t only have federal income taxes on Social Security benefits. You may also have to pay state income taxes on your benefits depending on where you live. The following states currently tax Social Security benefits to some extent:
| State | Tax Regulation Summary |
|---|---|
| Colorado |
|
| Connecticut |
|
| Kansas |
|
| Minnesota |
|
| Missouri |
|
| Montana |
|
| Nebraska |
|
| New Mexico |
|
| Rhode Island |
|
| Utah |
|
| Vermont |
|
Data sources: State websites.
Note that Missouri and Nebraska will eliminate state income taxes on Social Security benefits beginning in 2024.
5. You could potentially take steps to reduce the income taxes on your benefits
There are ways to reduce federal and state income taxes on Social Security benefits. All involve lowering your overall taxable income. Three potential alternatives include:
- Convert your traditional IRA or 401(k) to a Roth plan. Withdrawals on Roth IRAs and Roth 401(k)s aren’t taxed at the federal or state level, so your overall income can be reduced. Be aware, however, that the conversion itself has tax implications.
- Shift income-generating investments to non-taxable assets. You’ll usually have to count dividends, interest from bonds, and interest from savings accounts as income. However, interest from municipal bonds is generally not subject to federal and state income taxes.
- Hold off on collecting Social Security benefits. It could help some retirees to rely on other assets to initially fund retirement and delay receiving Social Security benefits. Those other assets will typically be taxed at higher rates. Drawing them down can reduce your income when you do begin collecting Social Security.
It’s best to consult your financial advisor to determine the best strategy to take for your situation.
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