Understanding the Taxation of Social Security Benefits

Reading time: 8 minutes

Published: February 6, 2025
Modified: March 19, 2025

One of the goals of Raining Pennies is to take complicated topics and break them down into something more digestible for my readers. This post is a great example of that. Understanding the taxation of Social Security benefits can be confusing, especially when looking at the IRS’s official explanation ↗, which includes worksheets, formulas, and exceptions that can quickly make your head spin. My goal here is to cut through that complexity and give you a clear, practical understanding of how these taxes work—without all the unnecessary confusion.

To help you navigate this, we’ll break down how Social Security benefits are taxed at both the federal and state levels and explore strategies to minimize your tax liability.

Key Takeaways

• Up to 85% of Social Security benefits can be taxed at the federal level, depending on combined income.
• State taxation varies, with 41 states exempting Social Security benefits from income tax.
• Strategies like managing income and Roth IRA conversions can help minimize tax liability.

Determining Federal Taxation of Social Security Benefits

When determining the taxable portion of your Social Security benefits, the IRS uses Combined Income—which consists of your Adjusted Gross Income (AGI), nontaxable interest, and half of your Social Security benefits. The Combined Income determines whether a portion of your benefits is taxable and, if so, how much:

Combined Income = Adjusted Gross Income (AGI) + nontaxable interest + 50% of Social Security Benefits

Once the taxable portion is determined, it is added to your other sources of income, such as wages and pensions, to calculate your total taxable income. After applying any deductions, this total determines your overall tax liability.

The Social Security Benefits amount used for tax calculations is the total from Box 5 of all your Forms SSA-1099 and RRB-1099. This represents your benefits paid to you before Medicare premiums are deducted.

The IRS uses the following thresholds to determine taxability:

• Single filers:
  • If combined income is $25,000 – $34,000:
    • 50% of the portion of combined income exceeding $25,000 is taxable.
    • However, the total taxable Social Security benefits cannot exceed 50% of total Social Security benefits. If this limit applies, then 50% of total Social Security benefits is taxable.
  • If combined income is above $34,000:
    • $4,500 (which is 50% of the portion between $25,000 and $34,000) is always taxable.
    • 85% of the portion of combined income exceeding $34,000 is taxable.
    • However, the total taxable Social Security benefits cannot exceed 85% of total Social Security benefits. If this limit applies, then 85% of total Social Security benefits is taxable.
• Married filing jointly:
  • If combined income is $32,000 – $44,000:
    • 50% of the portion of combined income exceeding $32,000 is taxable.
    • However, the total taxable Social Security benefits cannot exceed 50% of total Social Security benefits. If this limit applies, then 50% of total Social Security benefits is taxable.
  • If combined income is above $44,000:
    • $6,000 (which is 50% of the portion between $32,000 and $44,000) is always taxable.
    • 85% of the combined income exceeding $44,000 is taxable.
    • However, the total taxable Social Security benefits cannot exceed 85% of total Social Security benefits. If this limit applies, then 85% of total Social Security benefits is taxable.
• Head of Household:
  • Same rules as Single Filers.
• Married Filing Separately:
  • If you lived apart from your spouse for the entire year, then the same rules as Single Filers apply.
  • If you lived with your spouse for any part of the year, then 85% of Social Security benefits is taxable, regardless of income level.

Example Calculations

Let’s consider six examples to illustrate how Social Security benefits are taxed.

Example 1: Single Filer with $22,000 Combined Income

• AGI: $10,000
• Nontaxable Interest: $0
• Social Security Benefits: $24,000
• Combined Income = $10,000 + $0 + ($24,000 × 50%) = $22,000
• Since the Combined Income is less than $25,000, none of the benefits is taxable.

Example 2: Single Filer with $29,000 Combined Income

• AGI: $20,000
• Nontaxable Interest: $0
• Social Security Benefits: $18,000
• Combined Income = $20,000 + $0 + ($18,000 × 50%) = $29,000
• Since the Combined Income is between $25,000 and $34,000, 50% of the portion of Combined Income exceeding $25,000 is taxable:
  • Taxable Social Security Benefits = ($29,000 – $25,000) × 50% = $2,000

Example 3: Single Filer with $40,000 Combined Income

• AGI: $32,000
• Nontaxable Interest: $2,000
• Social Security Benefits: $12,000
• Combined Income = $32,000 + $2,000 + ($12,000 × 50%) = $40,000
• Since the Combined Income exceeds $34,000:
  • $4,500 (50% of the portion of Combined Income between $25,000 and $34,000) is always taxable.
  • 85% of the portion of Combined Income exceeding $34,000 is taxable: ($40,000 – $34,000) × 85% = $5,100
  • Taxable Social Security Benefits = $4,500 + $5,100 = $9,600

Example 4: Single Filer with $33,000 Combined Income—Taxable Benefit Capped at 50%

• AGI: $30,000
• Nontaxable Interest: $0
• Social Security Benefits: $6,000
• Combined Income = $30,000 + $0 + ($6,000 × 50%) = $33,000
• Since the Combined Income is between $25,000 and $34,000, 50% of the portion of Combined Income exceeding $25,000 is taxable:
  • Preliminary Taxable Social Security Benefits = ($33,000 – $25,000) × 50% = $4,000
  • However, when the Combined Income for a single filer is between $25,000 and $34,000, the total taxable Social Security benefits cannot exceed 50% of total Social Security benefits, which is ($6,000 × 50%) = $3,000
  • Since the $3,000 limit is less than the Preliminary Taxable Social Security Benefits of $4,000, the Taxable Social Security Benefits is $3,000.

Example 5: Married Filing Jointly with $37,000 Combined Income

• AGI: $20,000
• Nontaxable Interest: $2,000
• Social Security Benefits: $30,000
• Combined Income = $20,000 + $2,000 + ($30,000 × 50%) = $37,000
• Since the Combined Income is below $44,000, 50% of the portion of Combined Income exceeding $32,000 is taxable:
  • Taxable Social Security Benefits = ($37,000 – $32,000) × 50% = $2,500

Example 6: Married Filing Jointly with $114,000 Combined Income

• AGI (excluding benefits): $60,000
• Nontaxable Interest: $4,000
• Social Security Benefits: $100,000
• Combined Income = $60,000 + $4,000 + ($100,000 × 50%) = $114,000
• Since the Combined Income is above $44,000, 85% of the portion of Combined Income above that threshold is taxable:
  • $6,000 (50% of the portion between $32,000 and $44,000) is always taxable.
  • 85% of the portion of Combined Income exceeding $44,000 is taxable: ($114,000 – $44,000) × 85% = $59,500
  • Taxable Social Security Benefits = $6,000 + $59,500 = $65,500

State Taxation of Social Security Benefits

While federal taxation follows the IRS guidelines, states have different rules:

• Nine states ↗ (9) currently tax Social Security benefits, though some offer partial exemptions based on income.
• Forty-One (41) states and Washington, D.C. do not tax Social Security benefits.

However, even in states that tax Social Security, exemptions and deductions can reduce the impact. For instance:

• Colorado ↗ allows deductions based on age and income.
• Connecticut ↗ provides income tax exemptions based on filing status and income.

Strategies to Spread Taxable Income and Minimize Social Security Taxes

Minimizing the taxation of Social Security benefits isn’t just about keeping income low—it’s about managing when and how taxable income is received. Since Social Security taxation is based on combined income, spreading taxable withdrawals and other income sources across multiple years can help reduce spikes that push more of your benefits into the taxable range.

Below are some key strategies to help you manage your income more effectively and potentially lower the taxes owed on your Social Security benefits.

• Manage income levels: Keeping Adjusted Gross Income (AGI) below taxable Social Security thresholds can help reduce the portion of benefits subject to tax. This can be done by:
  • Using Roth withdrawals strategically: Since Roth IRA withdrawals are not included in AGI, they won’t increase combined income or trigger higher Social Security taxation.
  • Spreading out capital gains and other taxable income: If you need to sell investments, consider spreading the sales over multiple years to avoid pushing your combined income into a higher taxable range.
• Roth IRA conversions: Converting funds from a traditional IRA to a Roth IRA can be an effective long-term strategy. While the conversion itself is taxable, future withdrawals from the Roth IRA are tax-free and won’t count toward combined income. This can help reduce taxable Social Security benefits and lower Required Minimum Distributions (RMDs) in later years, preventing large tax burdens in retirement.
• Coordinating Social Security benefits with other retirement income: While delaying Social Security benefits increases monthly payments, it may also result in higher taxes later if those benefits overlap with Required Minimum Distributions (RMDs) from traditional IRAs and 401(k)s. A potential strategy is to take controlled withdrawals from traditional IRAs or 401(k)s earlier in retirement, before claiming Social Security, to spread taxable income over more years and reduce the impact of large RMDs later. This can help keep combined income lower in later years, potentially reducing the portion of Social Security benefits subject to tax.

Conclusion

Understanding how Social Security benefits are taxed helps retirees make informed financial decisions. By planning wisely, individuals can reduce their tax burden and maximize their retirement income.

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