Do I pay income tax on my Social Security benefit?

You worked your whole life, paid into the system, and now it is time to finally collect your Social Security check, but how much of it are you actually going to get to keep?

Up to 85% of your Social Security benefit is taxable, but it really all depends on the other income you are bringing in.

Income Taxes: Social Security Federal Income Tax
Income Taxes: Social Security Federal Income Tax

While some people will pay no federal income tax on their Social Security check, others have to pay tax on up to 85% of their Social Security check.

What is my “Combined Income” for Social Security?

If your Social Security benefits are taxable or not all comes down to your combined income. Combined income is calculated by using the formula below:

Your adjusted gross income
+ Nontaxable interest
+ ½ of your Social Security benefits
= Your “combined income”

You do not need to memorize this formula. Your CPA or the tax software you use will do this calculation for you. You can even do the calculation yourself on the IRS website:https://www.irs.gov/help/ita/are-my-social-security-or-railroad-retirement-tier-i-benefits-taxable

As you can see, what affects this number the most is your adjusted gross income. Adjusted gross income is going to be the taxable income you bring in for the year, from wages and pension payments, to interest and dividends, and distributions from your retirement accounts.

There is planning that can be done in order to lower your adjustable gross income and keep more of your Social Security check in your pocket.

How much does my combined income have to be for me to pay taxes on Social Security?

Once you know your combined income, you’ll be able to figure out how much of your Social Security benefit is taxable.

If the only income you have coming in is Social Security, you are not going to pay any income taxes on your Social Security. If all you have coming in is Social Security and a small amount of other income, you’re still not going to pay income taxes on your Social Security.

If you have substantial income in addition to your benefit, you will pay income tax on your Social Security. The amounts are as follows:

  • If you are filing as an “individual” and your combined income is:
    between $25,000 and $34,000, up to 50% of your benefit is taxable
    more than $34,000, up to 85% of your benefit is taxable
  • If you are filing as a joint return and your combined income is:
    between $32,000 and $44,000, up to 50% of your benefit is taxable
    more than $44,000, up to 85% of your benefit is taxable
  • If you are married filing separately, you probably will pay taxes on your benefit

As you can see the numbers vary based on if you are filing individually or jointly.

If you are filing as a married filing separately, you will pay tax on your Social Security benefits. One starting Social Security, we have many clients change to a joint return to keep more of their check. We can help you evaluate your situation and see if this switch would be beneficial for you.

It is important to note, when it says that “up to 50% of your benefit is taxable”, that does not mean your Social Security is being taxed at a 50% rate. This means that only 50% of your benefit is able to be taxed at the rate that you fall into. You can learn more about tax brackets here. 

It is also important to note that this means 50% of your benefit is tax free. Even if you are in the top income bracket with 85% taxable, 15% of your Social Security income is always going to be tax free.

Listen to learn more about federal income tax on Social Security:

How about state income tax on Social Security?

There are 13 states that currently tax Social Security. Those states are Colorado, Connecticut, Kansas, Minnesota, Missouri, Montana, Nebraska, New Mexico, North Dakota, Rhode Island, Utah, Vermont and West Virginia. West Virginia is planning to phase out their state tax on Social Security by 2022.

All these states do not tax Social Security in the exact same way, and many people who live in these states still do not end up paying state income taxes on their benefit. You can learn more about how every state views Social Security here.

How do I pay less tax on my Social Security benefit?

Many clients come to us to figure out how to stop losing so much of their Social Security check to taxes. For past years, there is really nothing that can be done. Where we really help clients is putting strategies into place to lower their taxes in the future.

The only way to lower the taxes paid on Social Security is to lower your other taxable income. This will make your combined income fall into one of the brackets where either only 50% of your check is taxable or even into the bracket where none of your Social Security income is taxable.

The most common strategies we help clients put into place to lower their taxable income are Roth conversions and QCDs (Qualified Charitable Distributions).

While you can learn more about both of these strategies here, just know that for most people, these strategies have to be put in place over the course of a few years.

At Cardinal, we want to help you have the best retirement possible, and that means keeping more of your Social Security check. Especially if you haven’t started your benefit yet, contact us to see if some of these strategies might work for you!

Have questions? Contact us today.