Social Security Taxes: How Much Do Recipients Really Pay?

More than 50 million people collect Social Security retirement benefits, and many of them pay taxes on those benefits. Since Social Security benefits make up nearly a third of the retirement income of those older than 65 -- and 90% or more of income for 12% of men and 15% of women older than 65 -- it's important to be informed about the taxation of benefits.

Below, I'll take a look at the topic.

Image source: Getty Images.

What to expect from Social Security

Social Security benefits may not be as generous as you think. As of January, for example, the average monthly Social Security retirement benefit was only $2,075, or nearly $25,000 per year.

If you've earned more than average, you can receive bigger benefit checks -- but they won't be that much bigger. The maximum benefit was recently $5,181, or about $62,000 annually, but very few people can qualify for it.

To get an idea of how much you can expect to receive from Social Security, set up a my Social Security account at the Social Security Administration (SSA) website. Then you'll be able to pop in anytime for the latest estimates of your future benefits.

Federal taxation of Social Security benefits

As you may know, the federal government taxes some Social Security benefits -- but not all of them. It all depends on your income -- specifically, your "combined income," which is your adjusted gross income (AGI), plus non-taxable interest, plus half of your Social Security benefits.

The table below offers details:

Source: Social Security Administration. Chart by author.

Note that the table isn't showing that you'll hand over 85% of your benefits if you have a relatively high income -- it just means that up to 85% of your benefits may get taxed at your ordinary income tax rate.

If you've set up a "my Social Security" account, you'll be able to ask the IRS to withhold taxes due from your benefits, which can make things easier. (Naturally, if too much is withheld, you'll get a refund.)

State taxation of Social Security benefits

When it comes to state-level taxation of Social Security benefits, the news is very good, because fully 42 states -- plus the District of Columbia -- don't tax Social Security benefits at all. Here are the 42:

• Alabama
• Alaska
• Arizona
• Arkansas
• California
• Delaware
• Florida
• Georgia
• Hawaii
• Idaho
• Illinois
• Indiana
• Iowa
• Kansas
• Kentucky
• Louisiana
• Maine
• Maryland
• Massachusetts
• Michigan
• Mississippi
• Missouri
• Nebraska
• Nevada
• New Hampshire
• New Jersey
• New York
• North Carolina
• North Dakota
• Ohio
• Oklahoma
• Oregon
• Pennsylvania
• South Carolina
• South Dakota
• Tennessee
• Texas
• Virginia
• Washington
• West Virginia
• Wisconsin
• Washington, D.C.
• Wyoming

These are the states that do tax Social Security benefits:

• Colorado
• Connecticut
• Minnesota
• Montana
• New Mexico
• Rhode Island
• Utah
• Vermont

Even here, the news is good because, while each state taxes the benefits differently, they tend to exclude people with relatively low incomes from being taxed. Some even exclude those who have reached certain ages.

For example, in Montana, benefits were recently partially taxed based on income levels. They were exempt for incomes below $25,000 for single people and below $32,000 for those who are married and file jointly. And in New Mexico, most seniors' benefits aren't taxed at all, as those singles earning less than $100,000 and married couples filing jointly with incomes under $150,000 are exempt.

Even those who do get taxed often face a fairly low tax rate. So chances are, your state won't be getting much, if any, of your Social Security benefits.

To get a clearer idea of what taxes you might face, search online for your state's Social Security tax policy.