Nobody likes to pay taxes, but nearly everyone has to. Even once you've stopped working, you might still need to file a tax return and pay income tax -- and shockingly, you might also have to include some of your Social Security benefits as taxable income on your return.
Unfortunately, it's often not easy to figure out exactly what tax rate you'll pay on your Social Security benefits. That's because there are a few different steps you'll have to follow to see which tax rate applies to you. Below, we'll look at the process of figuring out what tax rate you'll pay on your monthly benefits.
The tax rate on Social Security for most people: 0%
For the majority of taxpayers, Social Security benefits end up being free of tax. That's because you're allowed to have up to a certain amount of income before you have to include any of your Social Security on your tax return.
Specifically, start by taking your income from other sources -- wages and salaries, interest and dividend income, and distributions from pension plans, for example -- and then add in half of your Social Security benefits for the year. That gives you your countable income, and if it's less than $25,000 for singles or $32,000 for joint filers, then congratulations! Your tax rate is 0%.
When you have to include some Social Security as taxable income
Only if your countable income is above those threshold numbers do things get complicated. The general rules that apply to Social Security taxation are as follows:
- For single filers with countable incomes between $25,000 and $34,000 and joint filers with incomes between $32,000 and $44,000, up to half of your benefits can be included in taxable income.
- For single filers with countable incomes above $34,000 and joint filers with incomes above $44,000, up to 85% of benefits can get treated as taxable income.
However, there are a couple of nuances here. First, the actual percentage of your Social Security that you have to include in taxable income can vary widely, and while it can't exceed 50% or 85% for the respective categories above, it can be quite a bit below that. For instance, if you're single and your countable income was $25,002, then only $1 of your Social Security income would be subject to tax.
Second, even once you do this calculation, it only tells you how much of your benefits you have to include in your income. To find out how much tax that will produce, you also have to know your marginal income tax rate.
Applying tax brackets to Social Security income
It's impossible to come up with a single rule that will cover every situation involving income taxes and Social Security benefits. However, you can come up with some general observations that can provide some color to the question. For instance:
- The highest rate that you'll pay in federal income taxes on your benefits is 31.45%. That rate applies if you're in the top 37% income tax bracket, and the maximum 85% of benefits gets included as taxable income.
- It's common for seniors who have incomes that are not too far above the thresholds to be in the 12% tax bracket. So that would work out to a 6% tax rate if 50% of your benefits is subject to tax, or a 10.2% tax rate if 85% of your benefits gets taxed.
- Those with incomes in between can expect to have the majority of their benefits subject to tax. That assumption produces tax rates that range from 11% for those in the 22% bracket who have half their Social Security subject to tax, to 29.75% for those in the 35% bracket with 85% of their benefits taxed.
Those numbers are rarely going to be exactly the same for you, but they should give you a sense of where you're likely to land in your own tax situation.
Can you cut your Social Security taxes?
There are a few ways you can affect how much tax you pay on Social Security, most of which tie into decisions about taking retirement plan withdrawals as taxable income. Apart from that, though, most older Americans don't have much flexibility with their tax planning. For them, knowing what tax rate will apply can simply help them prepare for what they'll have to pay the IRS at tax time.