This article was updated on November 8, 2017, and originally published on April 30, 2016.
You may have to pay taxes on some of your Social Security benefits, but this generally only happens if you have significant taxable income in addition to Social Security. Depending on your income, you could have to pay your federal income tax rate on up to 85% of your Social Security benefits. Here's a rundown of the Social Security tax rules, applicable income limits, and a calculator that can help you determine how much of your Social Security benefits may be taxable.
What is your "combined income"?
Whether or not your Social Security benefits are taxable depends on your filing status and combined income, which is a total of your adjusted gross income (AGI), non-taxable interest, and half of your Social Security benefits.
For example, if you file a joint return with your spouse, and your combined AGI is $30,000, you don't have any non-taxable interest, and your combined Social Security benefits are $25,000 per year, your combined income would be:
How much tax will you have to pay?
Depending on your filing status and combined income, up to 85% of your Social Security benefits could be taxable.
- If your filing status is single, and your combined income is between $25,000 and $34,000, up to 50% of your benefits could be taxable. If your combined income is more than $34,000, up to 85% of your benefits could be subject to tax. And, if your combined income is less than $25,000, your benefits are not taxable at all.
- If you're married and file a joint return, the 50% taxable range is $32,000 to $44,000, and the 85% threshold is combined income of $44,000 or more. Married couples with combined income of less than $32,000 don't pay taxes on their Social Security benefits.
- Finally, if you're married and file a separate return, the threshold is zero. In other words, your benefits will probably be taxable, regardless of your income.
- It's also important to mention that no matter how high your income is, or what your filing status is, you won't pay taxes on any more than 85% of your benefits.
The result of this is that if Social Security is your only source of retirement income, or your other income is small, you probably won't have to pay taxes on your benefits.
If you want to get an accurate idea of how much of your benefits will be subject to tax, the IRS has a worksheet in Publication 915 (link opens PDF) that can help you do just that. Or, better yet, here's a handy calculator that can do the work for you.
If you anticipate owing taxes on your benefits, you can choose to make quarterly estimated tax payments, or you can choose to have taxes withheld from your Social Security checks throughout the year. Currently, the Social Security Administration gives beneficiaries the option to have 7%, 10%, 15%, or 25% of their benefits withheld for taxes, and choosing to do this could prevent you from having to pay a big tax bill at the end of the year.
Don't forget state taxes
So far we've only discussed federal taxes on Social Security benefits. Depending on where you live, you might also have to pay state taxes. As of this writing, 13 states tax Social Security benefits: Colorado, Connecticut, Kansas, Minnesota, Missouri, Montana, Nebraska, New Mexico, North Dakota, Rhode Island, Utah, Vermont, and West Virginia.
Four of these states -- Minnesota, North Dakota, Vermont, and West Virginia -- use the same formula as the IRS to determine how much of your Social Security benefits might be subject to tax. The others have their own income thresholds, many of which are significantly more generous than those of the IRS. For a complete rundown, here's a discussion of state Social Security taxes from my Foolish colleague Brian Stoffel.
Smart planning might reduce your taxes in retirement
If you're still years away from retirement, smart planning now could reduce or eliminate taxes on your Social Security benefits when you're older. Specifically, if you choose a Roth IRA instead of a traditional IRA for your retirement savings, your eventual withdrawals won't count toward your combined income. Of course, there's more to consider when choosing an retirement account than just Social Security tax implications, so here's some more information on these IRAs, and how to choose the best one for you.
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