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Guide to Social Security Taxes

Income Personal Finance Retirement Tax Filing Tax Guides TaxAct's Guide to Your 2023 Taxes
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Social Security benefits are crucial to many Americans’ retirement plans, providing a safety net to ensure financial stability during your golden years. But are Social Security benefits subject to taxation?

Let’s dive into the complexities of Social Security benefits and their potential tax implications.

At a glance:

  • Social Security benefits provide a source of income for retirees and are funded by a payroll tax.
  • Taxation of Social Security benefits depends on your income level and marital status.
  • Certain strategies can help minimize taxation on your Social Security income.

Are Social Security benefits taxed?

Yes, Social Security benefits can be subject to federal income taxes depending on your total income, including other sources besides Social Security. Your annual combined income and marital status play significant roles in determining the taxable portion of your benefits. Additionally, while most states do not tax Social Security benefits, some states have specific rules and income thresholds that may affect the taxation of these benefits.

Understanding Social Security benefits

Social Security benefits are designed to offer financial assistance to retired workers, their survivors, and those with disabilities. These benefits are funded through payroll taxes, providing a source of retirement income for those who paid Social Security taxes on their income.

Qualification for Social Security benefits primarily hinges on your work history. You accrue “credits” based on your earnings over time, with most individuals requiring 40 credits (equivalent to about 10 years of work) to qualify for benefits. The amount of Social Security income you receive correlates with your average earnings over your working years. The more you earn while working, the more you’ll receive when you retire.

To get an estimate of your personal Social Security benefit, you can create a my Social Security account on the Social Security Administration’s website. They have a tool to help you estimate your payments, and you can also play around with different retirement age scenarios to see how that might affect your Social Security income.

There are various types of Social Security benefits, including retirement benefits, disability benefits, survivor benefits for spouses and children, and Supplemental Security Income (SSI) for individuals with limited income and resources. For detailed information about each type, check out this guide by the Social Security Administration.

The Social Security tax: How benefits are funded

Because of the Federal Insurance Contributions Act (FICA), all employers must withhold two taxes from your pay: Social Security tax and Medicare tax.

Employers and employees split the cost of Social Security taxes, each paying a 6.2% tax rate for a combined total rate of 12.4%. Self-employed people pay the full 12.4% Social Security tax rate as part of the quarterly estimated taxes the IRS requires them to submit.

The federal government limits how much of your income is subject to the Social Security tax. In 2023, the Social Security tax limit is $160,200, making the maximum Social Security tax amount $9,932.40. The Social Security tax limit is set to increase to $168,600 in 2024, making the maximum tax amount for that year $10,453.20. You will not have to pay Social Security tax on income you earn beyond the Social Security tax limit.

Taxation of Social Security benefits

How much tax you pay on your Social Security benefits depends on your total income, including other income sources besides Social Security.

The federal government taxes retirement benefits for many people, but a portion of those benefits are tax-exempt. Generally, the lower your retirement income, the larger the exemption you’ll receive.

To determine the percentage of your Social Security income that’s taxable, the government looks at two things:

  1. Your annual combined income: This includes your adjusted gross income (AGI) — any income you earn from wages, capital gains, retirement plan distributions, pension payments, etc. — plus any tax-exempt interest you receive and half your Social Security benefits.
  2. Your marital status: If you are married, your taxable limit will be higher.

Most states do not tax Social Security, but 11 states do: Colorado, Connecticut, Kansas, Minnesota, Missouri, Montana, Nebraska, New Mexico, Rhode Island, Utah, and Vermont. Each state has its own income thresholds and taxation requirements, so it’s good to do your research to know what to expect when filing your tax return.

SSI is not taxable. This benefit is for people with low income or few resources who are blind, 65 or older, or have a qualifying disability.

Income thresholds and taxation rates

You will need to pay tax on Social Security payments once your annual taxable income reaches $25,000 (or $32,000 if you are married and file jointly).

How much tax you pay depends on how far over the limit you are:

  • As an individual earning between $25,000 and $34,000, up to 50% of your benefits may be taxable. If you earn over $34,000, you may have to pay income taxes on up to 85% of your benefits.
  • As a joint married filer earning between $32,000 and $44,000, up to 50% of your benefits may be taxable. If you make over $44,000, you may have to pay income taxes on up to 85% of your benefits.

This IRS worksheet can help you determine your taxable benefits.

But let’s look at a quick example. Say you are married and filing a joint return, and you and your spouse earn a combined income of $40,000 annually. This would make $20,000 (50% of $40,000) of your Social Security benefits subject to federal income tax.

Your total tax bill depends on your income tax rate, which is decided by your tax bracket. If you’re unsure which tax bracket you fall under, our tax bracket calculator can help you. We also have a helpful article explaining how tax brackets work.

Strategies to minimize Social Security taxes

In some cases, you may be able to reduce your tax liability on Social Security benefits. The simplest way to do this is to keep your total earned income below the taxable limits we mentioned above, but here are some other strategies to consider:

  • Utilize Roth accounts: Contributions to Roth accounts are made with after-tax dollars, meaning withdrawals from a Roth IRA or Roth 401(k) are tax-free. Because of this, Roth withdrawals will not affect your taxable income calculation and won’t increase any tax owed on your Social Security benefits.
  • Maximize taxable income before retirement: To minimize your taxable income when receiving Social Security benefits, some people may opt to increase their taxable income before retirement. You can do this by taking distributions from a tax-advantaged retirement account like a traditional IRA or 401(k). You can withdraw from these accounts without penalty once you reach age 59½. Note that you must still pay income tax on the amount you withdraw from these accounts, but the goal is to pay less tax by making these withdrawals before you start receiving Social Security benefits. Taking withdrawals early could also allow you to delay applying for Social Security benefits, meaning your payments will be higher.

As always, consulting a financial advisor can help you tailor these strategies or provide additional methods for your specific tax situation. Retirement planning can differ for everyone, so it’s essential to consider all the factors when deciding how much to withdraw and when.

How to report Social Security income on tax returns

When reporting Social Security income on your federal tax return, you’ll typically use Form SSA-1099. This form shows the total Social Security benefits you received during the tax year, including monthly retirement, survivor, and disability benefits. Any SSI you receive will not be included, as it is not taxable.

To report Form SSA-1099 in TaxAct®, navigate to Social Security Benefits within your federal tax return and follow the instructions. You’ll need to enter the amount in Box 5 of your SSA-1099. Box 5 details the net amount of Social Security benefits you received.

If you need additional assistance, check out our Form SSA-1099 FAQ page.

The bottom line

Navigating the taxation of Social Security benefits can seem overwhelming at first, but don’t forget that TaxAct can help you accurately report your Social Security income, allowing you to file with confidence.

Meanwhile, employing smart strategies can help optimize your retirement plan and potentially minimize the taxes on your benefits. Everyone’s financial circumstances differ, so crafting your own personalized approach (with a professional, if necessary) for managing your Social Security benefits and taxation is crucial.

This article is for informational purposes only and not legal or financial advice.
All TaxAct offers, products and services are subject to applicable terms and conditions.

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