A new bill winding its way through Congress aims to increase retirees’ net income from Social Security by eliminating federal taxation of benefits. Unless the You’ve Earned It Act miraculously becomes law, it is important that you understand how your Social Security benefits are taxed at the federal level.
You’ve contributed towards your Social Security benefits for decades (via your paychecks). If you have a well-funded retirement income plan to maintain a nice living standard, you will likely get hit with income taxes in retirement. The more retirement income you have, the more taxes you likely will pay. The myth that Social Security is not taxed is just that, a myth.
It’s estimated that 60% of retirees will owe no federal income taxes on their Social Security benefits, which may be why many believe Social Security benefits are tax-free. They are not. Sadly, a majority of retirees are living on what could be described as low income or, worse, living in poverty.
The good news is that Social Security income is taxed less than other forms of retirement income. Regardless of how much you make in retirement, at least 15% of your Social Security benefits will come to you tax-free.
Can You Live On Just Social Security?
Surviving on Social Security alone in retirement would be difficult for most Americans. The average person received just $20,469 per year in 2023. The maximum Social Security benefit for 2024 is expected to be $3,822 per month at full retirement age. (More if you wait until 70). For sure, this is a good amount of money, don’t get me wrong, but it’s not exactly living rich.
How much your Social Security benefits will be taxed will ultimately depend on your other income sources. This will be a combination of all other earnings in a given year plus some portion of your Social Security benefits. These other sources include distributions from your 401(k) or IRA, wages from work, dividends, royalties, or rental income.
How Are Social Security Benefits Taxed?
Let’s get down to the nitty-gritty of how your Social Security will be taxed. This is why you are still reading this article, right? Social Security taxation is based on your provisional income. Your provisional income equals your adjusted gross income (AGI), nontaxable interest (think municipal bonds), and 50% of your SS benefits. The provisional income total is then applied to the following income limits to determine your tax rate. For this conversation, I am talking about federal income taxation; you may owe additional taxes at the state level, depending on where you live.
How Much Income Can You Have Before Social Security Becomes Taxable?
When your provisional income falls below $25,000 as a single filer or $32,000 as a married filer, no taxes will be owed on Social Security benefits—a big win on the tax front, not a big win for your standard of living.
Income Range Where 50% of Social Security Is Taxable
For those with a provisional income between $25,001 and $34,000 filing single, or $32,001 and $44,000 filing as married jointly, just 50% of your Social Security benefits will be taxed at your marginal tax rate.
Income Range Where 85% Of Your Social Security Is Taxable
When you earn more, you will end up paying more in taxes. With a provisional income of $34,001 and above for single files or $44,001 and above when filing jointly, 85% of your Social Security benefit will be taxed at your marginal tax rate. For reference, in 2024, the top tax rate is 37%.
Your Social Security Earnings Statement
Filing taxes in the US is confusing. However, don’t worry; you won’t have to manually do all the calculations listed above. Every January, the Social Security Administration will send an earning statement to current Social Security recipients, showing the amount they were paid in SS benefits over the last tax year. This statement can be used to fill in your federal income tax return. Your tax software or tax professional will do all the math for you. PHEW! You should understand these Social Security taxation rules so you don’t get surprised with a big tax bill you may or may not have the money to pay.
When retirees receiving Social Security benefits anticipate owing taxes on their benefits, they have the option to make estimated quarterly tax payments. You also have the option to have federal taxes withheld from your Social Security checks. Think of this like the payroll taxes taken out of your paycheck.
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