Social Security survivor benefits are payments made to family members of a worker who has passed away. These benefits serve as a financial safety net, providing much-needed support during a trying time. Navigating the emotional stress that comes with these life changes, while trying to understand the often complex financial landscape of these benefits can be daunting. Contrary to common belief, these benefits can become taxable under certain circumstances, depending on the recipient’s income and filing status. But as the Social Security Administration notes, most children don’t have enough income to owe taxes on their survivor benefits.
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How Social Security Survivor Benefits Work
Survivor benefits are an important aspect of the Social Security program, offering financial support to the spouse, children or other dependents of an individual who has paid into the Social Security system and passed away. These benefits are designed to replace a portion of the income lost due to the worker’s death, providing a financial lifeline for the surviving family members.
The eligibility for these benefits is usually based on the deceased’s work history and the recipient’s relationship to the deceased. The primary beneficiaries often include the surviving spouse and minor or disabled children of the deceased. In certain conditions, even parents, grandchildren or step children could qualify for survivor benefits.
Typically, a surviving spouse can receive full benefits at full retirement age or reduced benefits as early as age 60. However, if the surviving spouse is disabled, they may be eligible to collect benefits as early as age 50. If there’s a qualifying child, the surviving spouse may collect benefits regardless of age.
Children can receive benefits until they turn 18, or 19 if they are still in high school. Disabled adult children may be eligible for benefits beyond age 18 if their disability began before the age of 22.
It’s important to note that there are limits on the total family benefits that can be paid. Typically, family benefits are capped at 150% to 180% of the deceased worker’s full retirement benefit.
When Are Survivor Benefits Taxable?
The taxability of survivor benefits hinges on the recipient’s income level. If their adjusted gross income (AGI), nontaxable interest and 50% of their Social Security benefits add up to more than $25,000 in 2023, a portion of their benefits may be taxable. However, if they are the sole recipient of the benefits and their total income falls below the $25,000 threshold, they won’t owe any federal income tax on these benefits.
For married couples filing jointly, the income threshold is $32,000. If the couple’s combined income surpasses this limit, a portion of the survivor benefits may become taxable.
While federal tax rules apply nationwide, state taxes can vary. Some states exempt Social Security benefits from income tax, while others follow federal guidelines. It’s essential to be aware of your state’s tax laws, which we’ll discuss later.
How Much Federal Tax You Could Pay on Survivor Benefits
The level of federal tax applied to survivor benefits is influenced by the beneficiary’s income level and filing status. Depending on those variables, as much as 50% or 85% of the survivor benefits may be considered taxable income.
If you’re an individual with a combined income between $25,000 and $34,000, or a married couple filing jointly with a combined income between $32,000 and $44,000, you may have to pay federal income tax on up to 50% of your survivor benefits. If your combined income exceeds these thresholds, up to 85% of your benefits could be subject to taxation.
States That Tax Survivor Benefits
While most states do not tax Social Security survivor benefits, 11 states tax these benefits:
- Colorado
- Connecticut
- Kansas
- Minnesota
- Missouri
- Montana
- Nebraska
- New Mexico
- Rhode Island
- Utah
- Vermont
This additional taxation can compound the financial burden on survivors. However, understanding these state-specific laws can provide an upper hand in managing your finances.
How to Avoid Taxes on Survivor Benefits
To make the most of these benefits and minimize the impact of taxes, it’s essential to have a well-thought-out financial plan that considers factors such as timing, investments, and tax-efficient strategies. Here are three common ways to avoid or minimize taxes on survivor benefits:
- Reduce your combined income: One way to reduce your combined income is by being mindful of your other sources of income. If possible, try to delay receiving other taxable income, like withdrawing from traditional IRAs or 401(k)s, until a later age. This can help keep your combined income below the taxable threshold.
- Tax-efficient investments: Invest in tax-efficient financial products, such as Roth IRAs or tax-efficient mutual funds. These investments can help you generate income with minimal tax liability, ensuring your survivor benefits remain untouched by the IRS.
- Professional advice: Tax laws can be complex and subject to change, so consulting with a tax advisor or financial planner can help you navigate the best strategies to minimize taxes on your Social Security survivor benefits.
Bottom Line
Social Security survivor benefits provide financial assistance to the loved ones of deceased individuals who were eligible for Social Security benefits. Survivor benefits can be partially taxable, depending on their overall income. The key factor that determines whether someone will owe taxes on these benefits is their combined income, which comprises their adjusted gross income (AGI), any tax-exempt interest they earn and half of their Social Security benefits.
Social Security Tips
- Planning ahead for Social Security is crucial. SmartAsset’s Social Security calculator can help you estimate how much your benefits could be worth based on when you plan to claim them.
- A financial advisor can help plan for Social Security and the potential tax implications of these benefits. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool doesn’t have to be hard. SmartAsset’s free tool matches you with up to three 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.
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