5 things retirees need to know about income taxes on Social Security benefits
You work for decades and pay taxes regularly to fund Social Security. Then, after a long career, you retire and start getting back the money you invested. No more taxes, right?
Many Americans would think so. But 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 some of your Social Security benefits.
You may not have to pay federal income tax on your Social Security benefits. According to the Social Security Administration (SSA), about 60% of retirees don’t need to. But that means about 40% will have to pay federal income tax.
The following table shows how the amount of federal tax you owe depends on how you file your taxes and how much you earn.
| Federal Tax Filing Status | combined income | tax benefit ratio |
|---|---|---|
| individual | Less than $25,000 | 0% |
| $25,000 to $34,000 | Up to 50% | |
| $34,000 or more | Up to 85% | |
| Married and filing jointly | Less than $32,000 | 0% |
| $32,000 – $44,000 | Up to 50% | |
| Over $44,000 | Up to 85% | |
| Married couple report separately | any | Up to 85% |
Data source: Social Security Administration. This is a table by author.
Combined income is your adjusted gross income (AGI) plus tax-exempt interest and half of your Social Security benefits.
2. There is an easy way to estimate how much you owe in federal taxes.
If you’re wondering how much you’ll owe in federal income tax on your Social Security benefits, here’s an easy way to calculate an estimate. Use the Internal Revenue Service’s online tax withholding calculator.
3. Federal taxes may be withheld from your benefits.
Having to pay a large tax bill at the end of the year can be painful. To avoid this, you can choose to have federal income taxes withheld from your Social Security benefits. All you have to do is download Form W-4 V: Request for Voluntary Tax Withholding from the SSA website, complete it, and mail or fax it to your nearest Social Security office.
4. You may also have to pay state income tax on your benefits.
Some Americans don’t just owe federal income tax on their Social Security benefits. You may also have to pay state income tax on your benefits, depending on where you live. The following states currently tax Social Security benefits to some degree:
| situation | Summary of Tax Regulations |
|---|---|
| Colorado |
|
| Connecticut |
|
| kansas |
|
| Minnesota |
|
| Missouri |
|
| montana |
|
| Nebraska |
|
| new mexico |
|
| rhode island |
|
| Utah |
|
| vermouth |
|
Data source: State website.
Missouri and Nebraska plan to eliminate state income taxes on Social Security benefits starting in 2024.
5. You can take steps to reduce your income taxes on your benefits.
There are ways to reduce your federal and state income taxes on your Social Security benefits. It’s all about lowering your overall taxable income. Three potential alternatives are:
- Convert your traditional IRA or 401(k) to a Roth plan. Roth IRA and Roth 401(k) withdrawals are not taxed at the federal or state level, which may reduce your overall income. However, keep in mind that the conversion itself has tax implications.
- Turn your income-producing investments into tax-free assets. Generally, you should count dividends, bond interest, and interest from savings accounts as income. However, interest on municipal bonds is generally not subject to federal and state income taxes.
- Hold off on receiving Social Security benefits. This may help some retirees rely on other assets to fund retirement early on and delay receiving Social Security benefits. These other assets are generally taxed at a higher rate. Lowering this amount may result in less income when you start receiving Social Security.
It is best to consult with a financial advisor to determine the best strategy for your situation.
