Please ensure Javascript is enabled for purposes of website accessibility

Are My Social Security Benefits Really Taxable?

By Dan Caplinger - Updated Apr 10, 2018 at 2:10PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Be prepared for this potentially unpleasant situation.

As Americans finish up preparing their tax returns, they're looking for every possible way to avoid as much tax as absolutely possible. In particular, once you've retired, you don't have extra income to help you weather unexpected tax burdens.

Yet, as happens every tax season, many older taxpayers are finding out for the first time that some of their Social Security benefits might be subject to tax. That sounds counterintuitive, given that they've already paid both income tax and Social Security payroll taxes on the earnings that helped produce those Social Security benefits. Yet almost 20 million people get taxed every year on a portion of their Social Security, and that number could rise in the years to come.

Three Social Security cards with a brass key on top.

Image source: Getty Images.

How did Social Security benefits become taxable?

The history of Social Security benefit taxation isn't all that long. Until about 35 years ago, there wasn't any income tax on Social Security. Efforts to deal with a looming financial crisis for the retirement program led lawmakers to consider the provisions, with the idea that raising revenue from a portion of those who collect benefits might be enough to help preserve Social Security for the long run.

Rather than making Social Security taxable for everyone, though, lawmakers imposed an income test. The IRS looks at your total income from non-Social Security sources and adds in one-half of your Social Security income. That outside income includes not only wages and salaries but also investment income like interest and stock dividends. Capital gains on investments are also included, as is any pension income you might receive from a former employer.

Once you have that total, you'll need to compare it to the income levels in the table below. If it's greater than the number in the middle column, then you can owe tax on up to half of your Social Security income. Once it rises above the figure in the rightmost column, that percentage rises to as much as 85% of your income becoming taxable.

Filing Status

50% Taxation Threshold on Social Security

85% Taxation Threshold on Social Security

Single, Head of Household, Qualifying Widow(er)

$25,000

$34,000

Married Filing Jointly

$32,000

$44,000

Data source: IRS.

What does that mean on the bottom line?

To understand how this works in real life, it's useful to look at an example. If you're single and get equal $1,000 monthly payments from Social Security, taxable investments, and a traditional IRA, then your total income for the year will be $36,000. However, to calculate the threshold for Social Security taxation, you'll take the $24,000 in outside income and then add half of the $12,000 in Social Security benefits, which comes out to $24,000 plus $6,000, or $30,000. Because that number is between $25,000 and $34,000 for a single person, up to 50% of the $12,000 in Social Security benefits that you received could be included in your taxable income. That maximum of $6,000 is less than the $10,200 maximum that would apply if the income figure were above the higher $34,000 threshold.

However, the actual amount taxed is often less than the theoretical maximum. There's a complex formula to determine the final amount. For instance, in the example above, only $2,500 of your Social Security benefits would be subject to tax. Rather than being 50% of your benefits, the formula comes up with a figure that's slightly higher than 20% of what you received from Social Security.

You can get more information on exactly what your situation looks like by running the numbers yourself. This Social Security income tax calculator is a good place to start, letting you put in the numbers that apply to you, and then telling you how much will be subject to tax.

Social Security and taxes

As a retiree, there's only so much you can do to control your income and, therefore, whether your Social Security benefits will be taxable. Yet by paying attention to things like taxable IRA or 401(k) distributions as well as when you decide to start taking Social Security in the first place, you might find that you can put off or even eliminate the taxes that you'd otherwise pay on a portion of your hard-earned benefits.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning service.

Stock Advisor Returns
331%
 
S&P 500 Returns
115%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 05/20/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.