Social Security serves as a key source of income for millions of retirees, but while some people don't pay taxes on their benefits, others are subject to taxes on a percentage of their payments. Whether or not you'll pay taxes on your Social Security benefits boils down to how much outside income you have, including interest income from tax-free bonds. While a healthy adjusted gross income can be instrumental in helping you cover your living expenses in retirement, it can also cause you to pay more taxes on Social Security.

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When are Social Security benefits taxed?

Social Security is the sole source of income for an estimated 25% of seniors, and while relying too heavily on Social Security could put you in a tough financial spot, having too much outside income can also hurt you from a tax perspective. To see if you'll need to pay taxes on your benefits, you'll have to calculate your provisional income.

Your provisional income is determined by taking your non-Social Security income, including tax-free interest you receive from municipal bond investments, and adding 50% of your Social Security benefit amount. Remember, there are different sources of outside income you might receive as a retiree, from IRA or pension plan distributions to dividends to capital gains. You can use this handy tool to calculate your provisional income and see whether your Social Security benefits will be subject to taxes:


* Calculator is for estimation purposes only, and is not financial planning or advice. As with any tool, it is only as accurate as the assumptions it makes and the data it has, and should not be relied on as a substitute for a financial advisor or a tax professional.

Note that you could be taxed on up to 50% of your benefits if:

  • Your provisional income is between $25,000 and $34,000 as a single tax filer.
  • Your provisional income is between $32,000 and $44,000 as a joint filer.

Furthermore, you may be taxed on up to 85% of your benefits if:

  • Your provisional income is more than $34,000 as a single filer.
  • Your provisional income is more than $44,000 as a couple filing jointly. 

Knowing what percentage of your benefits is likely to be taxed can help you plan accordingly. Not only will this calculator tell you whether your benefits will be subject to taxes, but it will also break down how much you can expect to owe based on your benefit amount, tax bracket, and income.

Avoiding taxes on Social Security

If you want to hang onto more of those Social Security dollars, there are a few tactics you could employ. First, if you don't need the additional income, hold off on taking withdrawals from your traditional IRA or 401(k). Though you'll be required to start taking minimum distributions from these accounts once you turn 70 1/2, waiting to take withdrawals might buy you a few tax-free years as far as Social Security goes.

Another tactic that might help you avoid Social Security taxes is opening a Roth IRA. Roth IRAs don't impose required minimum distributions, so if you don't need the money, you can let it sit in your account untouched for as long as you please. But even if you do withdraw funds from a Roth IRA, that money doesn't count toward your provisional income. Furthermore, your distribution itself will also be tax-free, which means you can take out as much money as you want without having to worry about the IRS getting its share.

Don't forget about state taxes

While your provisional income will pay a role in determining whether you'll need to pay taxes on Social Security, where you live might also have an impact. Currently, there are 13 states that tax Social Security benefits to varying degrees:

  • Colorado
  • Connecticut
  • Kansas
  • Minnesota
  • Missouri
  • Montana
  • Nebraska
  • New Mexico
  • North Dakota
  • Rhode Island
  • Utah
  • Vermont
  • West Virginia

Now this isn't to say that you shouldn't retire in one of these states just because you'll face taxes on your benefits. Rather, it's just one additional point to consider when you make your retirement plans.

Many retirees are caught off-guard when they learn that their Social Security benefits are partially taxable. Knowing what to expect tax-wise won't necessarily make you feel better about the situation, but it will help you prepare financially for what lies ahead.