Social Security helps millions of older Americans keep up with their expenses, and while it was never designed to serve as a sole source of income for retirees, the reality is that many seniors rely on it far more heavily than they should. While some Social Security recipients don't pay taxes on their benefits, there are certain scenarios in which Social Security income in indeed taxable. Depending on where you live and the amount of additional retirement income you have coming in, your benefits could be subject to taxation. Knowing what to expect as far as Social Security taxes go can help you prepare accordingly.


When is Social Security taxed?

If Social Security is your sole or predominant source of income in retirement, there's a good chance you won't pay taxes on it. But if you have other sources of income, you might pay federal taxes on your benefits. To see if you'll be required to pay taxes on Social Security, you'll need to calculate your provisional income. To do so, take your non-Social Security income, coupled with whatever tax-free interest payments you receive for the year (such as interest from municipal bonds), and add in 50% of your Social Security benefit amount.

If your total falls between $25,000 and $34,000 and you're a single tax filer, or between $32,000 and $44,000 as a joint filer, then you could be taxed on up to 50% of your benefits. If your provisional income exceeds $34,000 as a single filer or $44,000 as a couple filing jointly, then you could be taxed on up to 85% of your benefits.

States that tax Social Security

Federal taxes aside, you might lose a portion of your Social Security payments if you live in a state that taxes benefits. Currently, these 13 states tax Social Security benefits to varying degrees:

  • Colorado
  • Connecticut
  • Kansas
  • Minnesota
  • Missouri
  • Montana
  • Nebraska
  • New Mexico
  • North Dakota
  • Rhode Island
  • Utah
  • Vermont
  • West Virginia

Of the states on this list, Minnesota, North Dakota, Vermont, and West Virginia are the only ones that don't offer some form of exemption. Retiring in a state that doesn't tax Social Security could help you stretch your budget as a senior, but be aware that the overall cost of living might still be higher in states that don't tax benefits.

Lowering your taxes in retirement

While you may not manage to avoid paying taxes on your Social Security benefits, there are other things you can do to keep your taxes to a minimum. A Roth IRA, for instance, can help you avoid taxes, because while your initial contributions are made with after-tax dollars, the withdrawals you take in retirement are completely tax-free.

Another good way to lower your taxes in retirement is to take advantage of deductions. Healthcare, for example, is a huge expense for most seniors, but if your out-of-pocket costs for the year exceed 10% of your adjusted gross income, you can take a medical expense deduction on your taxes.

If you still own a home in retirement, then you may have a deduction coming your way even if you've paid off your mortgage. Though most homeowners get the largest tax break by claiming a mortgage interest deduction, you can still write off whatever you pay in property taxes for the year.

Finally, don't forget about charitable contributions. Even if you don't have a lot of money to give away, you can still donate unwanted goods to a registered charity and write off their fair market value.

When you're living on a fixed income, losing a portion of your Social Security payments to taxes can increase your financial strain. The more you prepare for this reality, the better equipped you'll be if the IRS does wind up getting its share of your benefits.