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Is Social Security Taxable?

Is Social Security taxable? This may strike you as an odd question, given that your benefits are the product of years of prior taxes. Despite this, according to the Social Security Administration, "about one-third of people who get Social Security have to pay income taxes on their benefits."

This begs two questions. First, why are some people's benefits taxed while others are not? And second, assuming you're included in this minority, how much are you likely to be on the hook for?

When are Social Security benefits taxable?

Determining whether your Social Security benefits are taxable is a straightforward process. This is because it all turns on your so-called "combined income."

In short, your combined income is your adjusted gross income (i.e., your gross earnings reduced by a handful of items, including business expenses, health savings account deductions, etc.), plus nontaxable interest plus one-half of your Social Security benefits.

An easier, albeit shorthand, way to think about this is simply as your total earnings plus half your benefits. Importantly, because the calculation focuses on earnings, it excludes withdrawals from a retirement account such as an IRA or 401(k).

Once this is calculated, you'll then be able to determine whether your benefits will be taxed. Here's how it breaks down:

Scenario

Single Taxpayer

Joint Taxpayers

Social Security benefits not taxed if combined income is less than...

$25,000

$32,000

As much as 50% of benefits taxed if combined income is between...

$25,000 and $34,000

$32,000 and $44,000

As much as 85% of benefits taxed if combined income is more than...

$34,000

$44,000

Source: Social Security Administration.

If Social Security benefits are taxable, what tax rate applies?

Assuming that at least a portion of your benefits are taxable, then that portion will be treated as "ordinary income" for federal income tax purposes. This means that your exact tax liability will be a function of the tax bracket(s) you're otherwise in.

For the current year, here's how the tax tables break down:

Tax Rate

Single

Married Filing Jointly or Qualifying Widow

Married Filing Separately

Head of Household

10%

$9,075 or less

$18,150 or less

$9,075 or less

$12,950 or less

15%

$9,076 to $36,900

$18,151 to $73,800

$9,076 to $36,900

$12,951 to $49,400

25%

$36,901 to $89,350

$73,801 to $148,850

$36,901 to $74,425

$49,401 to $127,550

28%

$89,351 to $186,350

$148,851 to $226,850

$74,426 to $113,425

$127,551 to $206,600

33%

$186,351 to $405,100

$226,851 to $405,100

$113,426 to $202,550

$206,601 to $405,100

35%

$405,101 to $406,750

$405,101 to $457,600

$202,551 to $228,800

$405,101 to $432,200

39.6%

> $406,751

> $457,601

> $228,801

> $432,201

Source: Internal Revenue Service.

The bottom line on Social Security and income taxes

The answer to the question of whether or not your Social Security benefits will be taxed is: It depends.

If you earn a substantial income in retirement, then you may have to re-remit as much as 39.6% of 85% of your benefits to the government. If, on the other hand, you rely exclusively on Social Security, then you'll likely be able to keep it all.

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Read/Post Comments (13) | Recommend This Article (4)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On August 21, 2014, at 9:15 AM, deckdawg wrote:

    "Importantly, because the calculation focuses on earnings, it excludes withdrawals from a retirement account such as an IRA or 401(k)."

    Are you sure about this? I looked at the 1040 instructions, and it looks to me like IRA and 401K withdrawals are included in your AGI. The SS Benefits worksheet in the 1040 instructions seem to combine 1/2 of your SS income, plus just about all other sources of income. (See instructions 3, 4 and 5 on the SS Benefits worksheet).

  • Report this Comment On August 21, 2014, at 1:01 PM, drborst wrote:

    Also, aren't 401(k) withdraws taxed? Or is that taxed separately.

  • Report this Comment On August 21, 2014, at 1:21 PM, JohnMaxfield37 wrote:

    deckdawg/drborst -

    Distributions from retirement accounts are only included in your combined income (which determines whether, and how large a portion of, your benefits must be included in taxable income) if the distributions aren't "qualified."

    Check back here in a couple of days, as I recently wrote an article about this very thing which will likely be published in the next week or so.

    John

  • Report this Comment On August 21, 2014, at 3:24 PM, classic216 wrote:

    Do the same rules apply to public pensions?

  • Report this Comment On August 21, 2014, at 4:32 PM, JohnMaxfield37 wrote:

    classic216 -

    As a general rule, payments from public pensions are fully taxable.

    Here's the IRS's explanation:

    http://www.irs.gov/taxtopics/tc410.html

    - John

  • Report this Comment On August 21, 2014, at 8:30 PM, ss06470 wrote:

    Earnings are only a factor in whether you pay social security taxes not income taxes

  • Report this Comment On August 21, 2014, at 9:53 PM, notyouagain wrote:

    Thank you, John

    I became disabled in 2012, and have done a little digging trying to figure out if I would jeopardize my SSDI if I managed to save some money and invest.

    The good news is that would only affect SSI, not SSDI.

    Bottom line, I found, I can still strive to build some dividend income as long as my dividends added to my SSDI don't exceed $25,000.

    That is the level I'd have to hit before needing to file a return.

    I'm not too worried about it. I'm unlikely to build a dividend income of over $10,000 anyway. But it was nice to find out I could do something with my money besides stash it under my mattress (or put it in a bank, which is no better than the mattress these days).

  • Report this Comment On August 21, 2014, at 11:49 PM, JohnMaxfield37 wrote:

    Just to clarify, I was referring in my first comment to qualified distributions from ROTH IRAs specifically (I had the ROTH rules at the forefront of my mind, as I was writing an article about them at the time).

    By contrast, for both traditional IRAs and 401(k)s, the distributions ARE taken into consideration for the purpose of calculating combined income and would thus influence whether or not (and to what extent) one's Social Security benefits are subject to federal income tax.

    If my first response led to any confusion, I apologize!

    John

  • Report this Comment On August 22, 2014, at 12:50 AM, notyouagain wrote:

    I know I was off on a different tack. But I have unrelenting bad luck, so since I am able to save some money in my situation, I can keep my mind active by continuing to do something that keeps my mind from turning to mush.

    I figure, with my luck, there will be cuts in the funding and if I can build up to having an extra few hundred bucks coming 4 times a year without it causing me any problems, I might be glad I did later.

  • Report this Comment On August 22, 2014, at 11:25 AM, ffbj wrote:

    I pretty much knew this stuff, but it always good to have a refresher. Also important to consider the personal allowance of 10k when thinking of federal income tax, and a number of states do tax benefits, though this was an article about federal.

  • Report this Comment On August 24, 2014, at 6:17 PM, 2thfool wrote:

    This may affect the optimum age for YOU to retire.

    For years, we've been told that each year, our Social Security income will increase 8% each year we delay retirement after 62. That's correct for your pre-tax social security income.

    However ... if you have enough income for your social security to be taxable, then your additional social security income will also be taxable, too, at your ordinary rates.This may mean that your 8% rate is actually closer to 6% after taxes.

    So ... if you have enough money to go over the rather low income threshhold for social security to be taxed, you may want to retire earlier.

    Good luck figuring all this out.

  • Report this Comment On August 24, 2014, at 6:19 PM, 2thfool wrote:

    Forgot to add: Thanks for this excellent article.

  • Report this Comment On August 25, 2014, at 11:12 AM, gadfly1000 wrote:

    This article is VERY incomplete!!!

    Most important, it forgets to say that all the income tax collected on retirement benefits goes directly back to the Social Security funds, NOT to the general fund.

    Crucial issue not mentioned: The thresholds described have never been indexed for inflation. The tax on 50% of benefits began 31 years ago, in 1983, and the $25,000/$34,000 thresholds were the same then as now.

    When the tax on 50% began in 1983, Social Security truly was on the brink of not having money, unlike now, when there is a multi$trillion surplus.

    Keep in mind that employees were never taxed on the 50% contribution by employers, so to that extent this is not double taxation.

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John Maxfield
JohnMaxfield37

John has written for The Motley Fool since 2011. He has a bachelor's degree in economics from Lewis and Clark College and a juris doctorate from Southern Methodist University. View John Maxfield's profile on LinkedIn

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