Taxation of Social Security Retirement Benefits

Raymond Eustace |
Categories
Taxes
Retirement

Background

Social Security Retirement benefits are paid monthly to replace part of an eligible participant’s income when they reduce their work hours or stop working altogether.  The Social Security Administration offers a lot of resources to confirm eligibility, access benefit projection statements, and manage your Social Security account – we encourage workers to leverage the SSA website (see the first resource listed below), and to create an account prior to retirement,  to allow direct access to benefit statements and prepare for online management of their Social Security and Medicare benefits.

Many Social Security Retirement benefit recipients are not familiar with the rules related to taxation of these benefits.  This article is intended to familiarize readers with Federal and State taxation of Social Security Retirement benefits and the factors that can impact the extent to which these benefits are taxed.  

Topics Covered in This Article

  1. Definitions
  2. Federal taxation of Social Security Retirement benefits
  3. State taxation of Social Security Retirement benefits
  4. Other considerations
  5. Resources

Definitions

  1. FICA:  stands for the Federal Insurance Contributions Act.  This is a U.S. federal payroll tax levied on employees of corporations and is deducted from each paycheck.  A portion of the FICA tax funds Social Security benefits and a portion funds Medicare benefits.  
  2. SECA:   stands for the Self-Employment Contributions Act.  This is a U.S. federal payroll tax levied on self-employed individuals and is typically collected on a quarterly basis via estimated tax payments.  A portion of the FICA tax funds Social Security benefits and a portion funds Medicare benefits.
  3. Social Security Retirement Benefit:  this is the monthly benefit paid to eligible participants.   The amount of the benefit varies based on factors including the participants’ contributions, employment history and age.
  4. Combined Income:  this is used to calculate what portion of your Social Security benefits are eligible for federal taxation.  Combined Income is the sum of Adjusted Gross Income (AGI) PLUS Nontaxable Interest PLUS 50% of your Social Security income.

Federal Taxation of Social Security Retirement Benefits

Social Security income is taxable at the federal level, with the amount of your Social Security income that is included in your taxable income varying from 0% to 85%.  The portion of your Social Security income that is taxed depends on how much other taxable income you have, typically from sources including wages, pension and retirement plan distributions and investment-related income. 

  • If you rely exclusively on your Social Security benefits as for income, you likely won’t pay taxes on these benefits. 
  • If you have other sources of income while receiving social security benefits, then you should expect to pay some income taxes on your Social Security benefits.  You will pay taxes on up to 85% of your Social Security benefits, if:
  1. You file an Individual Federal tax return, and your Combined Income exceeds $25,000.
  2. You file a Married Filing Jointly Federal tax return, and your Combined income is more than $32,000.
  3. You are married and file separate returns.

Resources #3 and #4 can be used to estimate the specific taxable portion of your Social Security benefits.   Resource #4 includes several examples and a worksheet on page 16 that is used when completing your Federal tax return to define what portion of your Social Security income is taxable.  Most Income Tax Preparation software solutions such as TurboTax and H&R Block perform this calculation automatically.

State Taxation of Social Security Retirement Benefits

Most states do not tax Social Security Retirement income, but 10 states still tax this income at least to some extent.  These states are:  Colorado, Connecticut, Kansas, Minnesota, Montana, New Mexico, Rhode Island, Utah, Vermont and West Virginia (West Virginia passed a law to phase out taxation of Social Security benefits in 2026).  The taxation rules vary by state and are beyond the scope of this article.

Something to Consider

When assessing the age at which to begin taking their Social Security benefits, many taxpayers are steered to focus primarily on the fact that the monthly benefit amount will increase if you delay taking benefits between the earliest age of eligibility (62) and full retirement age (66 or 67, based on your year-of-birth).   Other factors that are often considered include:  1) do you need the income to cover your expenses before hitting full retirement age?, 2) your life expectancy, and 3) are you still working?   A factor that is often overlooked but should also be included in any Social Security benefit analysis is the impact of taxes on your benefits for each scenario you are considering.   Including the effects of taxation on your Social Security benefits in this type of analysis may affect decisions on when to begin taking Social Security and how to coordinate other post-retirement sources of income such as pensions, annuities and retirement plans.    

Summary

Many people who have earned the benefit of Social Security benefits are unaware of how these benefits may be taxed.  Consulting with a tax specialist or financial advisor who offers tax planning guidance can help you understand how Social Security benefits are taxed and build a strategy to optimize the taxation of your post-retirement income.

Resources

  1. Social Security website:  https://www.ssa.gov/.
  2. General information on Social Security Retirement Benefits: https://www.ssa.gov/retirement.
  3. IRS Interactive Tax Tool:  https://www.irs.gov/help/ita/are-my-social-security-or-railroad-retirement-tier-i-benefits-taxable.
  4. IRS Publication 915 – Social Security Retirement Benefits: https://www.irs.gov/pub/irs-pdf/p915.pdf.
  5. Social Security Benefit Age Planning Tool:  https://www.ssa.gov/benefits/retirement/planner/agereduction.html.
  6. https://smartasset.com/retirement/is-social-security-income-taxable.

*This content was developed from sources believed to be providing accurate information. The information provided is not intended as tax or legal advice, and readers are encouraged to seek advice from their own tax or legal counsel. Neither the information presented, nor any opinion expressed, constitutes a representation by us of a specific investment or the purchase or sale of any securities. Asset allocation and diversification do not ensure a profit or protect against loss in declining markets. This material was developed and produced by Eustace Advisors to provide information on a topic that may be of interest.  Copyright 2024 Eustace Advisors.