Social Security is a major source of retirement income for millions of Americans, so retirees must understand what factors could affect their benefits. For instance, contrary to popular misconception, Social Security benefits are subject to taxation under certain circumstances.
Read on to learn how benefits are taxed at the federal and state levels, and why more retired workers will have to pay taxes on their Social Security benefits in 2024.
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1. Social Security benefits taxes at the federal level
The Amendments of 1983 granted the federal government the authority to tax Social Security benefits, and the Omnibus Budget Reconciliation Act of 1993 extended that authority. Federal tax liability on benefits is based on combined income, which is defined as adjusted gross income plus nontaxable interest plus one-half of Social Security income.
The chart below shows the taxable portion of Social Security benefits at different combined income thresholds for single filers and married couples filing jointly.
|
Taxable Portion of Benefits |
Single Filers |
Joint Filers |
|---|---|---|
|
0% |
Less than $25,000 |
Less than $32,000 |
|
50% |
$25,000 to $34,000 |
$32,000 to $44,000 |
|
85% |
More than $34,000 |
More than $44,000 |
Data source: The Social Security Administration.
The IRS provides an interactive tax assistant to help Social Security beneficiaries determine their tax liability. Beneficiaries who owe taxes on Social Security income have two options: 1) Make quarterly estimated payments to the IRS, or 2) have federal tax withheld from benefits by filing a Form W-4V with the Social Security Administration.
2. More retired workers will owe federal income tax on Social Security benefits in 2024
The combined income thresholds were intended to target high earners. This means that less than 10% of Social Security recipients paid taxes on benefits when the law took effect in 1984. But the tax burden now falls on a much broader portion of the population because Congress has never adjusted the thresholds for inflation.
In other words, while Social Security benefits have received regular cost-of-living adjustments (COLAs) to account for rising prices across the economy, the combined income thresholds have remained fixed for decades. As a result, the portion of Social Security recipients whose benefits are taxed has risen steadily over time, from less than 10% in 1984 to more than 50% today.
For context, if the combined income thresholds had been adjusted for inflation, the lower limits would now be roughly $75,000 for single filers and $96,000 for joint filers. But retired workers hoping for a policy change are probably out of luck. Social Security is already facing a serious funding problem, and removing a source of income -- the taxation of benefits accounted for 4% of cash inflows in 2022 -- would only make the problem worse.
Here's the upshot: Social Security benefits will get a 3.2% COLA next year, so more beneficiaries will find themselves above the combined income thresholds. That means more retired workers will owe federal income tax on Social Security benefits in 2024.
3. Social Security benefits taxes at the state level
Some retired workers will also owe state income tax on Social Security benefits. As illustrated in the map below, 12 states currently tax Social Security, but that figure will drop to 10 by 2025 due to legislative changes in Missouri and Nebraska.
Chart by Author.
The 38 states (plus the District of Columbia) shown in white on the map above do not tax Social Security benefits, and 13 states do not tax retirement income from benefits, 401(k) plans, or IRAs.
However, retired workers should consider all variables when deciding where to live. Things that affect quality of life -- such as being close to friends and family -- are arguably more important than state-specific tax laws.
Moreover, certain tax-friendly states have a higher cost of living than less-tax-friendly states. For instance, New Hampshire and Washington generally do not tax retirement income, but both states have a cost of living that is 16% higher than the national average.
Retirees should understand how their state of residence taxes Social Security benefits, but the decision to relocate should focus on cost of living and factors that affect quality of life.
