You probably know that Social Security tax is deducted from each of your paychecks and that some of that money comes back to you in the form of benefits in your senior years. But not everyone is aware that the government could gouge you again in retirement by taxing your Social Security benefits if your income in retirement reaches a certain level.
The Social Security benefit tax formula is a little complicated, but it's something everyone should understand so they can take steps to avoid benefit taxation or at least avoid unpleasant surprises come tax season. Here's what you need to know to determine if your benefits are at risk of being taxed.
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Calculating your combined income
Your combined income determines whether or not you owe taxes on your Social Security benefits. You can calculate yours by adding up:
- Your adjusted gross income (AGI)
- Your nontaxable interest
- Half of your annual Social Security benefits
Your AGI is your annual income minus certain tax deductions, like tax-deferred retirement contributions. Married couples filing jointly must consider both partners' incomes and deductions. If you have municipal bonds or some tax-exempt savings bonds, you might also have nontaxable interest. Calculating half of your annual Social Security benefits is pretty straightforward. You can create a my Social Security account if you're not sure how much you're set to receive in benefits.
So someone with an AGI of $25,000 with $2,000 in nontaxable interest and $14,000 in annual Social Security benefits would have a combined income of $34,000 ($25,000 + $2,000 + $7,000 = $34,000).
Determining if you'll owe Social Security benefit taxes
The Social Security Administration sets the following thresholds when calculating Social Security benefit taxes based on your combined income and tax filing status:
|
Taxation Level |
Married Filing Jointly |
Married Filing Separately* |
All Other Tax Filing Statuses |
|---|---|---|---|
|
0% |
Under $32,000 |
N/A |
Under $25,000 |
|
Up to 50% |
$32,000-$44,000 |
N/A |
$25,000-$34,000 |
|
Up to 85% |
More than $44,000 |
Any amount |
More than $34,000 |
Source: Social Security Administration. Married Filing Separately column assumes you lived with your spouse at any point during the year. If this is not true, refer to the All Other Tax Filing Statuses column.
If you fall into the 0% taxation range for your tax filing status, you won't have to worry about paying any taxes on your benefits at all. If you land above this range, you will owe taxes on your benefits and you can figure out how much using the formula below.
Things are a little trickier for married couples filing separately than for other tax filing statuses. If you lived together at any point during the year, you will owe taxes on up to 85% of your benefits, regardless of your combined income. But if you didn't live together at all, you're subject to the same taxation rules as individuals, heads of household, and qualifying widow(er)s.
How to calculate your Social Security benefit taxes
Just because you could owe taxes on up to 50% or 85% of your Social Security benefits doesn't mean you'll actually owe taxes on that amount. If you fall into the 50% taxation range, the government says you should owe taxes on the lesser of half of your Social Security benefits or half of the difference between your combined income and the taxation threshold set by the IRS for your tax filing status.
Examples make this easier to understand, so let's consider an individual who receives $12,000 in Social Security benefits annually and has a combined income of $30,000. You'd calculate the amount they'd owe taxes on this way:
- Divide their Social Security benefits ($12,000) in half to get $6,000.
- Subtract the 50% taxation threshold for the individual's tax filing status ($25,000) from their combined income ($30,000) to get $5,000.
- Divide your result from Step 2 in half to get $2,500.
- The individual would owe taxes on the lesser of the result from Step 1 or the result from Step 3, in this case: $2,500.
Things get even more complicated if you fall into the 85% taxation range. If our individual had a combined income of $40,000 instead and still received $12,000 in annual Social Security benefits, you would calculate how much they would owe in taxes this way:
- Divide their Social Security benefits ($12,000) in half to get $6,000.
- Subtract the 50% taxation threshold for the individual's tax filing status ($25,000) from their combined income ($40,000) to get $15,000.
- Subtract the 50% taxation threshold for the individual's tax filing status ($25,000) from the 85% taxation threshold for their tax filing status ($34,000) to get $9,000.
- Subtract the result in Step 3 from the result in Step 2 to get $6,000.
- Multiply the lesser of your result from Step 2 or your result from Step 3 by 50%. In this case you'd multiply the result from Step 3 ($9,000) by 50% to get $4,500.
- Multiply your result from Step 4 by 85% to get $5,100.
- Add your result from Step 6 to the lesser of your result from Step 1 or your result from Step 5. In our example, the $4,500 from Step 5 is lower than the $6,000 from Step 1, so we would add the $4,500 to the $5,100 we got in Step 6 for a total of $9,600.
- Multiply your total Social Security benefits ($12,000) by 85% to get $10,200.
- The individual would pay the lesser of the result from Step 7 or the result from Step 8. In this case, they would owe taxes on $9,600 of their Social Security benefits rather than $10,200.
You can follow the same steps for any combined income or tax filing status. Just swap out the numbers in the example or use this worksheet. This formula can help you figure out how much of your benefits the government will tax, but what you will owe in taxes on your benefits depends on your income tax bracket for the year. Here's a guide to help you find yours for 2020.
Those who owe taxes on their Social Security payments may either make estimated quarterly payments to the IRS or request that the IRS withhold these taxes from their benefit checks. Having your benefits automatically withheld may be the smarter move if you don't want to calculate how much you ought to pay in each quarter.
States that tax Social Security benefits
The above calculations are for federal taxes on your Social Security benefits, but the following 13 states also tax benefits:
- Colorado
- Connecticut
- Kansas
- Minnesota
- Missouri
- Montana
- Nebraska
- New Mexico
- North Dakota
- Rhode Island
- Utah
- Vermont
- West Virginia
All of these states have their own formulas for taxing benefits. Check with your state Department of Revenue to figure out how much of your Social Security benefits you might owe state taxes on. Fortunately for residents of West Virginia, its government is beginning to phase out Social Security benefit taxes, and by 2022 it won't tax Social Security benefits at all anymore.
Avoiding Social Security benefit taxes
You might be able to tweak your spending if your combined income is close to the taxation thresholds listed above to reduce or avoid taxes on your Social Security benefits. Consider cutting back on spending or withdrawing more money from your Roth savings, if you have any, because this money does not count toward your combined income for the year. Charitable donations will also help reduce your combined income because you can write these off on your taxes.
If you're still working, consider delaying Social Security until you retire. This could help lower your combined income because you stop getting paychecks, which in turn might help you avoid Social Security benefit taxes. It'll also help boost your Social Security checks when you do finally begin claiming them. But don't delay your Social Security benefits past age 70. Your checks won't increase anymore after this, and avoiding Social Security benefit tax isn't worth giving up all the money your Social Security checks could provide.
Social Security benefit taxes aren't the easiest thing to understand, but it's important that you take the time to learn the rules. It can help you make more educated decisions about your Social Security benefits and your retirement savings so you can hold on to more of your hard-earned cash.
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