Filing taxes isn’t exactly a thrilling task, but for most people, it’s just a matter of filling out some forms and waiting for a refund. For many seniors, though, it’s a different story.
Unlike workers who have taxes withheld from their paychecks, retirees often owe the IRS money because their retirement withdrawals typically don’t have automatic tax withholding.
To make things even trickier, Social Security benefits can also be taxed if your income exceeds certain thresholds. Knowing how these taxes work and what you can do to minimize them can make tax season much less stressful.
Benefits
Social Security benefits weren’t always subject to federal income taxes. In the early 1980s, the government introduced Social Security benefit taxation to boost funding for the program. Then, in the 1990s, a second tax tier was added.
The IRS determines how much of your Social Security is taxable based on your provisional income, which is calculated as follows:
- Adjusted gross income (AGI)
- Plus any nontaxable interest (such as municipal bond income)
- Plus half of your annual Social Security benefits
The tax brackets for Social Security benefits remain unchanged and are not adjusted for inflation, meaning more retirees fall into taxable income ranges each year.
Benefit Taxation Thresholds
Filing Status | Provisional Income | Taxable Portion of Benefits |
---|---|---|
Single | $25,000 – $34,000 | Up to 50% |
Single | Over $34,000 | Up to 85% |
Married, filing jointly | $32,000 – $44,000 | Up to 50% |
Married, filing jointly | Over $44,000 | Up to 85% |
This does not mean the IRS takes 85% of your benefits. Instead, it means that up to 85% of your benefits will be subject to income tax at your regular tax rate. For example, if you’re in the 22% tax bracket, you would pay 22% tax on up to 85% of your benefits.
Since these tax thresholds haven’t been updated for inflation, more retirees are finding themselves owing taxes on their benefits each year.
Manage Taxes
Unlike wages, retirement withdrawals and Social Security benefits do not automatically have taxes withheld. If you find yourself owing taxes each year, you can:
- Request that the IRS withhold taxes from your Social Security checks
- Adjust tax withholding on retirement withdrawals to avoid a large tax bill
If too much is withheld, you’ll get the extra amount back as a refund when you file your taxes.
Roth Retirement Accounts
One of the best ways to reduce taxable income in retirement is to rely more on Roth IRA or Roth 401(k) withdrawals.
- Roth contributions are taxed upfront, meaning withdrawals in retirement are completely tax-free.
- This reduces your provisional income, potentially keeping your Social Security benefits out of the taxable range.
Tax Bracket
Since taxes on Social Security benefits are tied to your total income, be mindful of how much you withdraw from traditional IRAs, 401(k)s, and other taxable accounts. If you’re near the upper limit of a tax bracket, consider:
- Delaying some withdrawals until the next tax year
- Using other sources of income that won’t count toward provisional income
Payment Plan
If you owe more than you can afford to pay, the IRS offers payment plans to help spread out your tax bill. Ignoring tax debt can lead to Social Security garnishment, so it’s best to work with the IRS directly if you need assistance.
Tax Professional
If you’re unsure how Social Security taxes will affect you, it’s a good idea to speak with a tax expert. A professional can help you:
- Determine how much of your benefits will be taxable
- Find tax-saving strategies for your specific situation
- Identify if your state taxes Social Security benefits (some states do)
Future Changes
Former President Donald Trump has expressed interest in eliminating taxes on Social Security benefits, but so far, Congress has not taken action on this issue. Even if laws change in the future, it won’t help retirees who owe taxes this year.
Knowing how Social Security benefits are taxed can help reduce surprises at tax time and allow retirees to make smarter financial decisions. With the right planning, you can keep more of your benefits and avoid unexpected tax bills.
FAQs
How much of my Social Security is taxable?
Up to 85% of benefits can be taxed if your income exceeds certain thresholds.
How is Social Security taxation determined?
It is based on your provisional income, which includes AGI, tax-exempt interest, and half of your benefits.
Can I avoid Social Security taxes?
You can reduce taxes by managing withdrawals, using Roth accounts, and staying below tax thresholds.
Should I have taxes withheld from my Social Security?
Yes, withholding can help avoid a large tax bill at the end of the year.
Will Social Security taxation rules change?
There is talk of eliminating these taxes, but no changes have been made yet.