Is Social Security Taxable? // (Tips For 2021 Inside)
Posted by Elliot Marks
For the majority of Social Security recipients, they will be paying some income tax on at least a portion of their benefits. However, the specific amount that is due will depend on a few factors. The IRS began taxing Social Security benefits back in 1984, and those rules have remained much the same since then. The total amount of your income as well as your income tax filing status will help determine what percentage of your benefits will be taxed. Keep reading as we explain all the details to help you learn everything you need to know about paying taxes on your Social Security benefits.
How Much Of Your Social Security Income Is Taxable?
If you are reading this, you are probably wondering, "Are Social Security benefits taxable?" How Social Security works is by providing benefits to retired workers, so wouldn't paying tax on those benefits partially defeat that purpose? Thankfully, you never have to pay taxes on the total amount of your Social Security income. However, you might be required to pay taxes on up to 85% of that income. It really depends on how much additional income you have outside of your Social Security payments and whether you file an individual tax return or joint tax return. Let's take a look at both situations.
Individual Tax Rates
If you file an individual federal tax return and your gross income is less than $25,000, then your Social Security payments will not be subject to income tax. In 2020, the average Social Security income was around $18,000. So, if you relied solely on your Social Security payments with no other income, then you would not be required to pay any taxes on that income.
However, if your combined income was between $25,000 - $34,000, then you would owe income tax on 50% of your Social Security benefits. Bump that combined income up even further, and you'll owe more. Once you go above the $34,000 mark, then 85% of your benefits become taxable. We will discuss the specifics of calculating your combined income amount in the next section.
Married Tax Rates
If you are married and file a joint federal return with your spouse, then your benefits will be taxed in much the same way as an individual return. However, the income limits are slightly different. Joint filers can earn up to $32,000 without paying income tax on their benefits.
Once the combined income amount reaches $32,000 up to $44,000, then half of your Social Security benefits will be considered taxable income. If you report combined income of more than $44,000, then you'll owe taxes on 85% of our benefits. So, you can see that if you and your spouse both receive the average amount of Social Security (around $18,000), then you'll probably be paying taxes on half your benefits.
We will now take a deeper dive into exactly what constitutes combined income and how these calculations are performed.
Calculating Your Social Security Income Tax
Adjusted gross income, net income, combined income...what does it all mean? All these terms can be confusing, but they're extremely important when it comes time to calculate the amount of tax that you will owe to the IRS. Planning for taxes on your Social Security benefits will help you be prepared when the time comes to pay up. We will explain the details of these terms and then look at a couple of examples.
When calculating the amount of tax that you owe on your benefits, the IRS has created a worksheet to help you figure your taxable benefits. There are multiple calculations that take place on the worksheet, but here are the basics. First, you'll need to find the total amount of benefits that you received from Social Security for the year. You should receive a Form SSA-1099 as part of your annual Social Security statement that will show the amount of your benefits for the tax year.
Next, you need to determine the amount of additional income that you received during the tax year. This could be retirement income from an IRA, income from a part-time job, or even nontaxable interest income. Once you have these numbers, it's time to perform the calculation.
You'll need to take the total amount of your "other income" and add half your Social Security benefits to obtain your combined income. So, let's assume that you received the average benefits of $18,000 for 2020 and you had $22,000 of other income from retirement accounts. This gives you a gross income of $40,000. To get your combined income, you will take the $22,000 other income plus half your SS benefits which would give you $31,000 ($22k + $9k).
Since your combined income is $31,000 in this case, then that means that half your benefits will be considered taxable by the Internal Revenue Service because it falls into the $25,000 - $34,000 range for individuals. To get your net taxable income, you will use half your SS benefits ($9,000) plus your other income ($22,000) and subtract any itemized deductions or the standard deduction.
For married couples who file a joint return, the calculations are virtually the same. However, you will use the income from both persons in the calculation and use the joint filer ranges. But, the specifics of the calculations are the same.
How To Minimize Social Security Taxes
Nobody likes paying taxes, and most people are always looking for ways to minimize the amount of tax that they owe. This is no different for people who receive Social Security benefits. Thankfully, there are some things that you can do to help minimize the amount of tax that you will have to pay while receiving your benefits. We will take a look at a few of those methods here.
1. Utilize Roth Accounts
Traditional IRA and 401k accounts are funded using pre-tax dollars. Distributions taken from these accounts are then considered taxable income. One great way to reduce your taxable income is by utilizing Roth accounts. These are retirement accounts that are funded using after-tax dollars. Distributions from these accounts are not taxable since the taxes were already paid before the money was placed into the account.
Since these distributions are tax free, the Social Security Administration does not consider this income part of your adjusted gross income when calculating your combined income. As seen in the previous section, the lower your combined income, the less the amount of your benefits that will be taxable.
It is generally a good idea to manage your retirement accounts using a blend of traditional and Roth accounts. At full retirement age, this allows you to manage your distributions so that you can minimize your tax bill.
2. Purchase An Annuity
Purchasing an annuity is another way to lower your tax bill, but not just any annuity will work. You will need to specifically look for a qualified longevity annuity contract, or QLAC. A QLAC is an annuity that is purchased with funds from a retirement account, and the monthly payouts can be deferred all the way to age 85.
Under today's rules, a person can use up to the lesser of 25% or $135,000 of a retirement savings account to purchase a QLAC. Deferring the payments from this annuity contract can help reduce your gross income, and thus reduce the amount of your Social Security income that may be considered taxable.
You should keep in mind, however, that annuity contracts have both advantages and disadvantages. Purchasing one simply to avoid taxes on Social Security might not make the most sense for you. You should always consult a financial professional for advice on the best way to handle your personal situation.
3. Take Taxable Withdrawals Before Retirement
Another way to avoid higher tax bills is by taking some of your retirement distributions before you start receiving Social Security. Most people start receiving their SS benefits at age 67, and most retirement accounts allow for distributions with no penalty beginning at age 59 1/2. It might make sense for you to go ahead and start taking your retirement distributions before your Social Security benefits begin.
While this can potentially lower your income once you start receiving your Social Security, you should be aware that this will increase your income in your younger years. So, be cognizant of your tax implications when you begin to take these distributions. Even though there is no penalty for withdrawing these funds earlier, you will still be required to pay taxes on the funds.
Are Your SSI, Disability, Survivor or Spousal Benefits Taxable?
Generally, these programs follow the same tax rules as Social Security retiree benefits. However, SSI is an exception to that rule since it is a needs-based program. Let's go ahead and take a look at each one.
1. Supplemental Security Income (SSI)
The benefits from this program are not subject to income taxes. In order to qualify for this program at all, the recipient must have little to no income or resources. Given that fact, their income would not be above the threshold to require taxation of the benefits they receive.
2. Disability Benefits
SSDI benefits are taxable. Disability benefits follow the same tax rules as retiree benefits. If you file an individual return and have more than $25,000 in combined income, then at least half your benefits will be taxed. If your income is above $34,000, then 85% of your benefits will be subject to income tax.
3. Survivor Benefits
Survivor benefits paid to children are subject to the same tax rules as retiree benefits. However, most children do not have any additional income beyond the benefits themselves. So, in reality, taxes are rarely paid on survivor benefits because income amounts are nearly always below the threshold.
You should also be aware that survivor benefits paid to children do not count as taxable income for the parent or guardian who receives the benefit on behalf of the child. This income does not need to be reported by the parent or guardian who receives it.
4. Spousal Benefits
Again, this benefit follows the same rules as retiree benefits. When examining your total combined income, you'll owe taxes on half of these benefits if the amount is over $25,000. If it goes over $34,000, then you'll be required to pay taxes on 85% of the benefits.
Understanding State Taxes On Social Security Benefits
So far, we've only been discussing the implications of federal income tax. But depending on the state in which you reside, you might be required to pay state taxes on your benefits as well. The majority of states do not tax your Social Security benefits. However, some states tax these benefits following the Federal tax guidelines and others tax them based on their own state-specific rules.
States that follow the Federal tax rules: Vermont, West Virginia, Minnesota, North Dakota. West Virginia has recently begun to phase out state taxation of SS benefits. As of 2021, most residents in the state will now owe any taxes on their benefits.
States that partially tax SS benefits: Kansas, Connecticut, Colorado, Montana, Nebraska, Missouri, Rhode Island, Utah, New Mexico. These states tax benefits at varying levels. You might be entitled to exemptions based on your age and income level in these states. You should contact a tax professional or consult your state's specific rules for determining how much tax you will owe if you reside in one of these states.
The remaining 37 states do not place a state income tax on your Social Security benefits at all. You might still owe state taxes on distributions or retirement benefits from your private retirement accounts or other income, but no state taxes will be due on your Social Security benefits.
If you are receiving Social Security benefits, you might be wondering what to do when tax time rolls around. In some cases, you might be forced to pay taxes on at least a portion of that income. There are ways to lower those IRS payments though, such as putting away money in a Roth IRA or withdrawing some of your retirement benefits early. How much of your benefits are considered taxable will depend on your total income (including tax-exempt interest) and whether you file individually or are married filing jointly. Most states do not tax your benefits, although there are a handful that do. Now that you are armed with this information, you should be able to approach tax season with confidence knowing exactly how your benefits will be treated.
Frequently Asked Questions
At what age is Social Security not taxable?
There is not an age at which Social Security benefits become completely not taxable. Whether or not your benefits are taxable depends on your Adjusted Gross Income (AGI), calculated combined income, and your filing status. If your combined income is below the threshold for your filing status, then your benefits will not be taxed. However, if you are above the threshold, then either 50% or 85% of your benefits will be taxed depending on your total income.
Do seniors pay taxes on Social Security income?
It depends. The short answer is that seniors are not exempt from paying taxes on their Social Security income simply because of their age. Whether or not they are taxed on these benefits depends on the total amount of their gross income. If they only receive Social Security payments, then they likely will not be required to pay taxes on any of their benefits. However, if they receive additional income from a part-time job or a retirement account like a traditional IRA or 401k, then they will likely owe taxes on a portion of their Social Security benefits.
If they file an individual tax return and their combined income (total other income plus half their SS benefits) totals more than $25,000, then they will be taxed on 50% of their Social Security payments. If the combined income amount goes above $34,000, then 85% of their benefits will be taxed. Age is not a factor in determining whether these benefits will be taxed.
Who is exempt from paying Social Security tax?
First, let's talk about income tax on Social Security benefits. People receiving Supplemental Security Insurance or SSI benefits are exempt from paying taxes on those benefits. In addition, individual filers whose income is below $25,000 or married filing jointly filers whose total combined income is less than $32,000 are not required to pay taxes on any portion of their Social Security income.
Social Security tax may also refer to your withholdings from your paycheck that you pay into the system while you are working. This tax is part of the FICA taxes. Very few people are exempt from paying these taxes. There are a few exceptions though. State and local government employees who are included in a public retirement plan are not required to pay the tax because that would essentially be double dipping. In addition, foreign government officials working in the U.S. are not required to pay into the system. In rare cases, individuals may claim a religious exemption to paying the tax, although strict requirements must be met to qualify for this exemption.
Does Social Security income count as income?
Yes, your Social Security income does count as income for federal income tax purposes. Just how much of that income is taxable depends on your total income and your calculated combined income. Even though it counts as income, you are not required to pay any taxes on that income if you earn less than $25,000 per year. With the average Social Security payments equating to roughly $18,000 per year, individuals whose only income source is Social Security would not be required to pay any taxes on their benefits.
Married couples filing jointly have a slightly higher threshold at $32,000 before they are required to pay taxes on their Social Security benefits. If, however, you have additional sources of income like private retirement benefits or even a job, then this will likely push your income amount high enough to require payment of taxes on part of your Social Security income. At most, you will only be required to pay taxes on 85% of your SS income. Therefore, there will always be a 15% piece of your Social Security benefits that are considered tax free.
How are Social Security benefits taxed?
Your Social Security benefits are taxed at the Federal level as income just like the income from retirement accounts or a job. You will only pay taxes on, at most, 85% of your benefits. It is possible that you might not be required to pay taxes on any of your benefits if your total income is below the threshold for the year.
You might also be required to pay state income tax on your benefits if you live in a state that taxes them. The majority of states do not collect taxes on your benefits, but there are a handful of states that do. Some of them follow the same guidelines as the IRS while others have their own rules.
What happens to Social Security benefits when you die?
This is a complicated question that can have many answers depending on your specific situation. We will try to cover the basics, but you should always consult a Social Security expert for help. Generally, Social Security benefits stop when you die. They are designed to last through the end of a person's life, so when that person dies, the payments stop. However, there are exceptions to this rule.
Surviving spouses might be able to continue receiving benefits in some cases, especially if they are caring for a minor child of the deceased. A widow or widower of a benefit recipient can receive full benefits upon reaching full retirement age. He or she may also receive full benefits at any age if they are not remarried and are caring for a child of the deceased under the age of 16.
Children of the deceased may also receive survivor benefits if they are unmarried and under the age of 18. In some rare circumstances, divorced spouses might be able to receive survivor benefits as well, but you should consult a Social Security representative to talk through your specific situation.
Are Social Security benefits taxed after age 66?
Yes, Social Security benefits may still be taxed after age 66. Whether any of your benefits will be taxed by the IRS does not depend on your age. It depends on your filing status and total income. If your income is above the threshold limit, then you'll owe taxes on up to 85% of your benefit amount.
What is the difference between tax-free income and taxable income?
As the names imply, tax-free income is exempt from income tax. So, what is taxable income? Taxable income is considered as the amount of income you have for which you are responsible for paying incomes taxes. You might still be required to show the tax-free income on your tax return even though you will not owe any taxes on it. Some tax-free income is still used to calculate your total income for purposes of calculating your Social Security combined income. Taxable income is any income that is not exempt from IRS tax payments.
What is the taxable income limit for Social Security?
We've already learned the answer to the question, "Do you pay taxes on Social Security?" So, what is the highest amount that you will be taxed on? The taxable income limit for Social Security is 85%. Even at the highest income level, no more than 85% of your Social Security income will be considered taxable income. Therefore, you will always have at least 15% of your benefits that you will not be required to pay tax on.