An important aspect of your retirement planning and financial decisions is knowing how Social Security and taxes work. Being aware of the tax implications of Social Security benefits can help you avoid surprises.
Taxability
Not all of your Social Security benefits are subject to tax, but a portion of your benefits may be taxable depending on your income. While the age at which you retire or begin taking benefits affects how much you receive, it is largely your income and filing status that determine how much income tax is paid on your benefits.
To determine how much of your Social Security benefits are taxable, the IRS uses a tiered system based on your “combined income.” Your combined income for a given year is comprised of your adjusted gross income plus nontaxable interest and half of your Social Security benefits. Your benefits may be taxable if the total of your combined income is greater than the base amount for your filing status. 2024 limits are as follows:
• If your combined income is under $25,000 (single) or $32,000 (joint filing), there is no tax on your Social Security benefits.
• If your combined income is between $25,000 and $34,000 (single) or $32,000 and $44,000 (joint filing), up to 50% of the benefits can be taxed.
• If your combined income is above $34,000 (single) or above $44,000 (joint filing), up to 85% of the benefits can be taxed.
If you are married and file a joint return, you and your spouse must combine your income and Social Security benefits when figuring out the taxable portion of your benefits, even if your spouse did not receive any benefits.
Keep in mind that Social Security will not pay you two different benefits at the same time. For example, if you are married and take your spousal benefit, you will lose your retirement benefit if your spousal benefit is larger.
In addition to retirement benefits, other benefits from Social Security, including survivor and disability benefits, are subject to tax rules, with one exception: Supplemental Security Income payments (made to people with disabilities and older adults with little or no income) are not taxable. The IRS provides an online tool to help you determine how much, if any, of your Social Security income is taxable.
Tax Withholding
If you anticipate owing taxes on your Social Security benefits, you can choose to have federal taxes withheld. The withholding options can be 7%, 10%, 12%, or 22% of your benefits.
By having taxes withheld, you prepay a portion of your tax bill. You can set up this option when you first apply for Social Security or by completing and submitting IRS Form W-4V. You can also make quarterly estimated tax payments through Form 1040-ES to cover your anticipated tax liability.
Cost-of-Living Adjustment
Social Security benefits are increased by a small amount each your as adjustments for increases in the cost of living. The higher benefits can cause some recipients to move into a higher federal income tax bracket, particularly when inflation is high: The 2023 cost-of-living adjustment (COLA) was the largest in 40 years at 8.7%. Adjustments are typically smaller and recent projections suggest that the COLA for 2025 will approximate 2.6%.
State Tax on Social Security Benefits
Social Security benefits are not taxed in most states, but nine states tax benefits for 2024 (two less states than 2023):
Colorado
Connecticut
Kansas
Minnesota
Montana
New Mexico
Rhode Island
Utah
Vermont
Some state criteria for determining income tax are more advantageous for taxpayers than the federal government’s criteria, including higher income thresholds or higher deductions and exemptions that can lower the tax burden. New Mexico technically taxes Social Security benefits, but legislation passed last year provides higher income thresholds for exempting Social Security benefits.
Your trusted tax professional can help if you are anticipating retirement or seeking to confirm your tax-efficient strategy for your retirement years.
