One of the best things about retirement is that it can look different for everyone, yet still provide the same satisfying feeling. Whether it's traveling, picking up a hobby, or enjoying free time, one thing remains true: The less financial stress you have, the better.
Luckily, the U.S. has Social Security, a key financial resource for many Americans. It can provide a financial safety net for retirees, but like most other streams of income, there are tax implications that come along with it.
If you currently receive (or will soon receive) Social Security, knowing the tax rules and how they potentially impact your benefits is important. So, let's take a look.
Image source: Getty Images.
Which states currently have Social Security tax rules?
The good news for Social Security recipients is that the states are slowly but surely doing away with taxing Social Security. The could-be-better news is that as of early 2024, there remain 10 states where your Social Security benefit may be subjected to taxes (Missouri and Nebraska removed their taxes to start the year):
- Colorado
- Connecticut
- Kansas
- Minnesota
- Montana
- New Mexico
- Rhode Island
- Utah
- Vermont
- West Virginia
If you live in one of these states and receive benefits, you should check your state's specific rules, as they vary from state to state.
For example, Connecticut recipients can deduct 100% of their federally taxable Social Security income if their adjusted gross income (AGI) is below $75,000 for single filers and $100,000 for married couples filing jointly; in Kansas, an AGI above $75,000 means you're subjected to taxes regardless of your filing status; and in Utah, you'll pay a flat 4.65% tax rate applied to all income, not just Social Security.
Federal tax laws apply regardless of state rules
Federal tax rules on your Social Security benefits are unavoidable, regardless of your state's specific rules. However, the IRS doesn't use your earnings directly to determine your tax status; they use your "combined income." Your combined income includes your AGI, any income from tax-exempt municipal bonds, and half of your annual Social Security earnings.
For example, with an AGI of $60,000, Social Security benefits totaling $24,000 annually, and $1,000 from tax-exempt bond interest, the combined income would be $73,000 ($60,000 + $12,000 + $1,000).
Once you have that number, here is how much of your benefits are eligible for federal taxes based on filing status and combined income:
| Percentage of Benefits Added to Taxable Income | Filing Single | Married, Filing Jointly |
|---|---|---|
|
0% |
Less than $25,000 |
Less than $32,000 |
|
Up to 50% |
$25,000 to $34,000 |
$32,000 to $44,000 |
|
Up to 85% |
More than $34,000 |
More than $44,000 |
Data source: Social Security Administration. Table by author.
Don't worry: Uncle Sam doesn't plan to take most of your Social Security benefits
The key distinction here is that the percentages aren't how much your Social Security benefits will be taxed -- just how much are eligible to be added to your taxable income.
For instance, if you're single and have a combined income of $40,000, Social Security won't tax 85% of your benefits. Instead, up to 85% ($34,000) can be added to your taxable income for the year. The IRS will then tax it at your typical income tax rate. If you're in the 22% tax bracket, you would owe 22% on the taxable portion of Social Security benefits.
Like most things related to Social Security, these tax rules and brackets can change in any given year. That's why you should always stay informed so you're not caught off guard and can plan your finances accordingly.
