When it comes to Social Security, every dollar counts. Nearly 90% of current retirees depend on their benefits to some extent, according to a 2023 poll from Gallup, so it's crucial to ensure you're maximizing your monthly checks.
A major part of making the most of your benefits involves understanding how your payments are calculated. While you don't need to know every last detail when it comes to the calculations, it's wise to at least know the factors influencing your benefit amount.
Some of these factors are fairly well known, such as your income and the age at which you begin claiming. But there are a few others that are often overlooked, and they could affect your benefits by hundreds of dollars per month.
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1. State and federal taxes
Even in retirement, you may not be able to escape income taxes. Social Security can be subject to both state and federal taxes, but how much you owe (or whether you're subject to them at all) will depend on a few things.
State taxes will depend on where you live, and the good news is that the majority of states don't tax Social Security. These laws are also changing quickly, with many states doing away with this tax in recent years. If you're in a state that does currently tax benefits, then, it's a good idea to keep an eye on your local laws.
Federal taxes affect everyone regardless of location, and they depend on a figure called your provisional income -- which is your adjusted gross income plus half of your annual benefit amount and any nontaxable interest. So, for example, if you're pulling $40,000 per year from your 401(k) while earning $20,000 per year from Social Security, your provisional income would be $50,000 per year.
| Percentage of Your Benefits Subject to Federal Taxes | Provisional Income for Individuals | Provisional Income for Married Couples Filing Taxes Jointly |
|---|---|---|
| 0% | Less than $25,000 per year | Less than $32,000 per year |
| Up to 50% | $25,000 to $34,000 per year | $32,000 to $44,000 per year |
| Up to 85% | More than $34,000 per year | More than $44,000 per year |
Source: Social Security Administration. Table by author.
The good news is that regardless of your income, you won't pay federal taxes on more than 85% of your benefit amount. The not-so-good news is that because these income limits are so low, most retirees will pay federal taxes on at least a portion of their benefits.
2. Your marital status
If you're married, divorced, or widowed, you could be entitled to spousal, divorce, or survivors benefits, respectively. There are several requirements you'll need to meet for each type of benefit, but if you qualify, you could receive hundreds of dollars more per month.
With spousal and divorce benefits, you can collect up to 50% of the amount your spouse or ex-spouse will receive at their full retirement age. If you qualify for survivors benefits, you could receive your partner's entire benefit amount after they pass.
You can receive any of these types of benefits regardless of whether you qualify for retirement benefits. If you have worked long enough to receive Social Security based on your own work record, however, you'll only receive the higher of the two amounts -- not both.
3. The length of your career
To calculate your benefit amount, the Social Security Administration takes an average of your wages in the 35 years of your career when you earned the most. That number is then run through a complex formula and adjusted for inflation, and the result is your basic benefit amount -- or the amount you'll receive if you file at your full retirement age.
If you've worked for fewer than 35 full years by the time you begin claiming, you'll have zeros added to your average to account for the time you weren't working. That will bring down your earnings average, resulting in a lower benefit amount.
Social Security can make or break retirement for many older adults, so while the program can be complex and confusing at times, it's wise to at least understand the basics. When you know how these three factors will affect your benefit amount, you can head into retirement as prepared as possible.
