Social Security benefits look different than they did a month ago, thanks to the latest cost-of-living adjustment (COLA). You might be sizing up how far your new, larger check will buy each month -- but you might have less available for spending than you think.
Not everyone knows this, but the government can tax some of your Social Security checks if your income is high enough. A lot of people are likely to encounter this rule for the first time in 2023. Here's how to know if you'll be one of them.
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How the federal government taxes Social Security benefits
The government determines whether you owe taxes on your Social Security benefits by looking at your provisional income. This is your adjusted gross income (AGI), plus any nontaxable interest you have from your investments and half your annual Social Security benefit. For example, if you withdrew $40,000 from a 401(k), had no nontaxable interest, and earned $20,000 from Social Security in 2023, your provisional income would be $50,000.
The government uses this information in combination with your tax-filing status to decide how much of your benefits to tax, as shown in the following table:
|
Percentage of Your Social Security Benefits That Are Taxable |
Single, Head of Household, Qualifying Widow(er), or Married Filing Separately |
Married, Filing Jointly |
|---|---|---|
|
0% |
Provisional income under $25,000 |
Provisional income under $32,000 |
|
Up to 50% |
Provisional income between $25,000 and $34,000 |
Provisional income between $32,000 and $44,000 |
|
Up to 85% |
Provisional income exceeding $34,000 |
Provisional income exceeding $44,000 |
Data source: Social Security Administration. Chart by author.
To be clear, the table above doesn't tell you how much of your checks you'll have to give back to the government -- it only tells you what percentage is taxable. The actual amount you'll pay will depend, in part, on your income tax bracket for the year.
Continuing our example above, if you were a single adult with a provisional income of $50,000 and an annual Social Security benefit of $20,000, the government could tax you on up to $17,000 of those benefits. But the tax rate you'll pay depends on your tax bracket. These range from 10% to 37%, depending on your taxable income and filing status.
The thresholds for benefit taxation outlined above haven't changed in decades. As a result, more people owe them each year as the average Social Security check continues to rise. This will likely be the case in 2023, with benefits up 8.7%, compared to last year.
Your state government could tax benefits, too
In addition to federal benefit taxes, you could owe state taxes on your Social Security benefits if you live in any of the following places:
- Colorado
- Connecticut
- Kansas
- Minnesota
- Missouri
- Montana
- Nebraska
- New Mexico
- Rhode Island
- Utah
- Vermont
- West Virginia
But calling one of these states home isn't a guarantee that you'll lose more of your checks. Each state has its own formula for determining who owes what, so you'll need to investigate the rules in your state to see if this is a concern for you.
What to do about Social Security benefit taxes
When you know Social Security benefit taxes are a possibility, you might be able to avoid them with the right strategy. If you have Roth savings, for example, you can rely upon these accounts more when you near the taxation thresholds above. Roth accounts allow for tax-free withdrawals in retirement, so they won't affect your provisional income. You could also try cutting back on how much you withdraw from your tax-deferred retirement accounts.
But avoiding benefit taxes isn't always possible. If you think you'll owe, you'll need to prepare for the added tax burden. You can deal with this at the end of the year when you file your tax return or request that the Social Security Administration withhold some taxes from your Social Security checks throughout the year.
Even if you manage to avoid benefit taxes in 2023, you could owe them in future years. So always keep an eye on your provisional income and pay attention to any Social Security rule changes that could affect what you owe.
