One of the biggest misunderstandings I see among retirees is how federal income tax actually applies to Social Security benefits. Many people have heard that “85% of Social Security is taxable,” and they assume that means they will pay tax on 85% of their benefit. In reality, very few retirees end up anywhere near that number — and most pay far less in federal taxes than they expect.
In this Cardinal Lesson, Tom and I break down the formulas used by the IRS and Social Security, explain what “provisional income” really means, and walk you through real examples of typical retirees. Whether you’re single or married, this will help you understand how the numbers truly work.
The Formula Everyone Talks About — and Why It Confuses People
If you’ve ever Googled “Social Security income tax,” you’ve probably seen the same complicated chart that shows thresholds of 50% and 85%. The problem is that this chart is often misunderstood. It doesn’t mean that you owe tax on 50% or 85% of your benefits automatically.
Instead, the IRS uses something called provisional income — a number that includes:
- Your adjusted gross income (AGI)
- Plus any tax-exempt interest
- Plus half of your Social Security benefits
That provisional income number determines how much of your Social Security might be taxable. But even then, it’s a phased-in formula, not a hard cliff.
Real Examples: What Retirees Actually Pay
To make this clearer, we walk through two real-life examples in the video:
Example 1: Married Couple, Both Over 65
- $40,000 in IRA withdrawals
- $60,000 in Social Security benefits
- Total income received: $100,000
Based on the formula, you might expect 85% of Social Security to be taxable. But when we run the real calculations, only $28,000 of their $60,000 benefit ends up taxable.
After their standard deduction and senior deduction, their federal tax bill is just $2,143 — barely over a 2% effective rate on the $100,000 they’re living on.
Example 2: Single Retiree, Age 65+
- $20,000 in IRA income
- $30,000 in Social Security
- Total income: $50,000
Using the same formula, you might expect a much higher percentage to be taxed. But in reality, only about $5,300 of Social Security is taxable.
After deductions, their federal tax bill is only $161 — about a 3.2% effective tax rate.
These examples surprise a lot of people. The formulas look intimidating, but the end result is often much more favorable than most retirees expect.
Why This Matters for Your Retirement Planning
Social Security is the first piece of every retirement plan we build. It’s predictable income for as long as you’re alive, and understanding the tax impact helps you make smarter decisions with your IRA and 401(k) withdrawals, Roth conversions, and overall income planning.
When you understand how Social Security taxation actually works, you can avoid the fear that you’ll lose most of your check to the IRS — and feel more confident about your retirement income strategy.
If You’re Unsure, Let Us Run the Numbers for You
The truth is, these formulas are nearly impossible to calculate by hand. Even the charts can lead you in the wrong direction. In the video, Tom uses professional software to show how it works in real time — and we can do the same for you.
If you’d like a clear estimate of how much of your Social Security is taxable and what your actual federal tax bill will be, reach out to us at Cardinal Advisors. We’d be happy to help you see exactly where you stand.
