Retired people who get monthly Social Security payments may owe income tax on a portion of the benefits depending on their income and filing status. The amount of benefits exposed to taxes is determined based on income and filing status, and may range from 0 to 85%. The taxes applied to your $2,600 monthly benefit will depend on several factors.
Additionally, you may be able to reduce the amount of your benefits that get taxed by choosing the correct filing status, timing taxable retirement account withdrawals to occur in years when you’re already over the income thresholds and withdrawing from Roth accounts. Otherwise, some general-purpose strategies for reducing taxable income may also help shield Social Security benefits.
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Social Security Benefit Tax Basics
The federal government may tax a portion of your Social Security benefits if you earn enough from other sources. About 40% of Social Security recipients are subject to this tax, according to the Social Security Administration. To determine whether you are one of them, the IRS uses your filing status and your combined income, which is your adjusted gross income (AGI), plus any non-taxable interest, plus half of your Social Security benefit.
If you are a single filer, head of household or qualifying widower or widow with a dependent child and have combined income of no more than $25,000, none of your benefits are taxable. If your combined is more than that amount, but less than $34,000, you’ll owe taxes on up to 50% of your Social Security income. Over $34,000, taxes could apply to 85% your benefits. For someone who is married and filing jointly, the thresholds for 50% and 85% benefit taxation are $32,000 and $44,000, respectively. If you’re married and file separately, the income threshold is $0, so you’ll likely owe taxes on your benefits.
Social Security Benefit Taxes in Action
For example, if you are a single filer who gets $2,600 monthly from Social Security and has no other income, none of these payments would be subject to income tax. Your monthly benefit of $2,600 is equal to an annual benefit of $31,200. Multiplying $31,200 times 50% equals $15,600. This $15,600 is less than the $25,000 threshold for taxing Social Security benefits for a single filer, so your benefits won’t be taxed.
Your filing status may change this. If you are married filing separately and lived with your spouse at any time during the tax year, for instance, up to 85% of your Social Security benefits may be taxed no matter what your income is. That is the only filing status selection that by itself would cause you to owe taxes on any of your Social Security benefits, however.
If you have enough additional income, some of your benefits may be taxed, again depending on your filing status. For instance, if you file singly and have $50,000 in combined income in addition to your Social Security benefits, you might owe taxes on 85% of your benefit income. That’s because half your Social Security benefits, or $15,600, plus $50,000 in combined income equals $65,600 and that is more than the income threshold for taxing 85% of Social Security benefits.
In this situation, adding 85% of your Social Security income to your $50,000 in AGI would cost $4,659 in added taxes. Here’s how that works: 85% of $31,200 in annual Social Security benefits is $26,520. Adding that to $50,000 produces $76,520. Federal income tax on $76,520 is approximately $8,675. On $50,000 income alone, you would just owe $4,016.
In addition, you may owe state income tax on your Social Security benefits. Most states exempt this income from taxation, and the trend is for more states to follow this path. However, a few states still tax Social Security income, generally following the federal practice.
A financial advisor can help you navigate Social Security benefits and rules. Match with an advisor today.
Reducing Tax on Social Security Benefits
There are a number of strategies you can follow to reduce or avoid taxation of Social Security benefits. All involve some cost or inconvenience, but they may offer some financial benefits to specific taxpayers. Here are some options.
- Don’t use married filing separately status if you can help it.
- Take more taxable withdrawals in years when you are already over the limit. Then the following year you may be able to restrain withdrawals and keep your income below the thresholds.
- Withdraw from Roth accounts. Roth withdrawals aren’t taxable and won’t increase your combined income.
- Convert tax-deferred accounts to Roth IRAs. This involves paying taxes now at your current rate on converted funds, and also generally limits your ability to withdraw converted funds for five years. However, it can make sense if you expect to be in a lower tax bracket later on and don’t need converted money for expenses.
Beyond these strategies, almost any move to reduce your adjusted gross income can help you avoid or reduce taxes on Social Security benefits. For instance, you can sell money-losing investments at a loss to reduce your taxable income. Contributions to charity can also reduce taxable income and protect Social Security benefits from taxes. Bear in mind that investing in municipal bonds, which generate non-taxable interest, won’t reduce your combined income for Social Security benefit tax purposes.
If you expect to owe taxes on your benefits, you can get Social Security to withhold taxes from your monthly payments. You can set it up by calling Social Security’s toll-free number, 800-772-1213, or submitting Form W-4V, a voluntary withholding request downloadable from the IRS website. You can also use this free tool to match with a fiduciary financial advisor if you’re interested in additional guidance.
Bottom Line
You may owe taxes on your monthly Social Security benefits depending on your filing status, income and sources of income. You may be able to reduce the taxes on your benefits by selecting your tax filing status, bunching taxable withdrawals from retirement accounts, withdrawing from Roth accounts or converting transferring tax-deferred retirement funds to a Roth IRA. Some strategies for reducing AGI can also work, including tax-loss harvesting and contributing to charity.
Tips
- Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- Estimate the tax bill you’ll owe or the refund you’ll get on your next return using SmartAsset’s Tax Return Calculator.
- Keep an emergency fund on hand in case you run into unexpected expenses. An emergency fund should be liquid — in an account that isn’t at risk of significant fluctuation like the stock market. The tradeoff is that the value of liquid cash can be eroded by inflation. But a high-interest account allows you to earn compound interest. Compare savings accounts from these banks.
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