As you plan for retirement, you probably focus most on the savings and investing component. Tax planning often gets less focus, but it's also important. After forking over much of your hard-earned dollars to the IRS throughout your working years, you want to minimize your tax bill in retirement.
Some retirees are surprised to learn that even Social Security benefits are taxable. Read on to learn four key things everyone should know about taxes on Social Security -- and how you can lower your bill.
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1. Only part of your benefit is taxable
Uncle Sam won't come after your entire Social Security check. Here's how federal taxes on benefits break down:
Single filers
| Income | % of Benefit That's Taxable |
|---|---|
| Less than $25,000 | 0% |
| $25,000 to $34,000 | Up to 50% |
| $34,000 or higher | Up to 85% |
Married filing jointly
| Income | % of Benefit That's Taxable |
|---|---|
| Less than $32,000 | 0% |
| $32,000 to $44,000 | Up to 50% |
| $44,000 or higher | Up to 85% |
Source: Social Security Administration
Of course, that doesn't mean you'll pay up to 85% of your Social Security benefit in taxes, but rather, that up to 85% of your benefit can be treated as taxable income.
2. COLAs could increase your tax bill
A large cost-of-living adjustment (COLA) is usually good news for seniors -- but be aware of the potential tax bill. Unlike income tax brackets, Social Security's tax rates aren't adjusted for inflation each year. So a generous COLA could result in you paying a higher tax rate on your Social Security benefits.
3. Some states tax Social Security, too
As of 2023, Social Security benefits aren't taxed in 38 states, plus the District of Columbia. Thanks to new legislation, two new states will join that list: Starting in 2024, Social Security will no longer be taxable in Missouri. Nebraska is currently phasing out taxes on Social Security and will no longer impose taxes on benefits in 2025.
However, that leaves 10 states where some benefits are still subject to state taxes. Fortunately, many of the remaining 10 states exempt benefits from taxation for residents whose incomes are below a certain threshold or offset the tax with credits.
4. You can choose how to pay taxes
If you're among the estimated 40% of Social Security recipients who have to pay taxes on their benefits, you can choose how to pay your tax bill. You can either have your taxes withheld from your benefits or make quarterly estimated payments to the IRS.
If you want to have taxes withheld from your benefits, you'll need to complete IRS Form W-4V and submit it to Social Security. You can opt to have 7%, 10%, 12%, or 22% withheld for tax purposes.
Why Roth accounts are your secret weapon against Social Security taxes
If you want to shield as much of your future Social Security benefit from taxes, consider saving for retirement in a Roth IRA or Roth 401(k). You don't get an upfront tax break on your contributions, but your distributions in retirement are completely tax-free. Plus, distributions won't count as income in Social Security's calculations.
Of course, it's essential to enlist the help of a professional as you plan for taxes in retirement. But for many workers, giving up a tax break now in exchange for more tax-free income in retirement is a trade-off that's well worth it.
