How to Avoid the Social Security Tax Trap

What Is Social Security Income?

Social Security is an insurance benefit program. It was established in 1935 by then-President Franklin D. Roosevelt. People pay into the program through payroll or other deductions. The program is operated by the Social Security Administration (SSA).

Social Security provides benefits for individuals in three different categories:

  • Retirement Benefits: Individuals pay into the Social Security program through payroll deductions and income taxes. The amount depends on the highest 35 years of earnings and when someone chooses to take their benefits. People who pay for at least ten years can claim benefits when they turn 62. Benefits max out if they wait until they turn 67, which is considered full retirement age, or when they reach 70.
  • Disability Benefits: This part of the program pays individuals who aren’t able to work because of a physical or mental disability. Conditions are assessed and are expected to last more than a year or may even result in death. Family members may also be eligible. People who claim disability benefits are required to meet earnings tests.
  • Survivors Benefits: These benefits are paid to spouses, children, and other dependents of Social Security recipients after they die. Survivors are required to apply for benefits in certain circumstances, including if they receive benefits themselves or if benefits aren’t automatically paid out.

If you receive benefits, you may be wondering how much of your Social Security income is taxable. Depending on the amount of your Social Security benefits and other income, including tax-free interest on municipal bonds and certain other excludable amounts, your benefits are included with other taxable income at the rate of 85%, 50%, or zero. It all depends on the steps you take to reduce your tax exposure. Keep reading to find out how you can cut back on the tax liability on your Social Security Income.

Key Takeaways

  • Social Security benefits are included with other taxable income at 85%, 50%, or zero.
  • Your benefits are taxed if your income falls below $32,000 (married filing jointly) or $25,000 (single, heads of household, qualifying widow(er), or married filing separately where spouses lived apart for the entire year).
  • Half of your benefits are taxed for income between $32,000 ($44,000 for married couples filing jointly) while 85% is includable if your income is more than $44,000.
  • Half of your Social Security benefits are includable for a single filer, head of household, qualifying widow(er), or married filing separately where spouses lived apart for the entire year for income between $25,000 and $34,000 while 85% of benefits are includable for income above $34,000.
  • Check with your state’s tax department to see if you have to pay state taxes on your Social Security benefits.

Calculating Social Security Income Taxes

To know whether your Social Security benefits are partially taxed or fully tax-free, you need to follow formulas unique to this determination. Add together your:

  • Gross income with certain adjustments. This is the amount from line 21 of Form 1040. Be sure to add any income excluded from interest on U.S. savings bonds that was used for higher education in addition to employer-provided adoption benefits, foreign earned income or foreign housing, and income earned by residents of American Samoa or Puerto Rico.
  • One-half of your Social Security benefits. This is the amount listed on Form SSA-1099, Social Security Benefit Statement, which is sent to you by the SSA by the end of January following the year in which benefits were paid. For income tax purposes, the benefits are the gross amount listed in box 3, not the net amount you actually received after premiums for Medicare were withheld.
  • All taxexempt interest. This is interest from municipal bonds listed on line 8a of Form 1040.

Your Base Amount

Compare the results to a base amount fixed for your filing status:

  • $32,000 if married filing jointly
  • $25,000 if single, head of household, qualifying widow(er), or married filing separately where spouses lived apart for the entire year

Your Tax Liabilty

You must determine whether 50% or 85% of benefits are includable if the income mix you figured out earlier is equal to or above your base amount. Here’s how it works:

  • For married persons filing jointly, 50% is includable for income between $32,000 and $44,000; 85% is includable if income is more than $44,000.
  • For those who are single, head of household, a qualifying widow(er) filing separately where spouses lived apart for the entire year, 50% is includable if income is between $25,000 and $34,000; 85% of benefits are includable if income is above $34,000.

For a married person filing separately who did not live apart from their spouse for the full year, 85% of benefits are includable.

None of your benefits are taxed if you fall below this base amount.

Special Considerations 

Don’t use the usual computation if any of the following applies to your situation:

  • You made deductible individual retirement account (IRA) contributions and you (or your spouse) were covered by a qualified retirement plan through your job or self-employment. In this case, use the worksheet in IRS Publication 590-A.
  • You repaid any Social Security benefits during the year, which is explained in IRS Publication 915.
  • You received benefits this year for an earlier year. You can make a lump-sum election that will reduce the taxable amount for this year. Use worksheets in IRS Publication 915.

Bunch Your Income

You may want to push or defer income to another year since 85% of benefits are includable once you pass the $44,000/$34,000 income threshold.

For instance, if you know your income will be above this threshold and you’re planning on converting a traditional IRA to a Roth IRA, make the conversion this year and pay the taxes on it. Doing so won’t result in any additional inclusion of Social Security benefits.

You won’t have to take required minimum distributions (RMDs)​ in the future because you have a Roth IRA, not a traditional one. This will keep your income lower in future years than it would have been without the conversion.

State Income Tax Rules

Federal income tax isn’t the only tax you need to consider. You also have to account for state taxes when it comes to your Social Security.

As of 2021, 13 states tax Social Security benefits. Seven of these states—Connecticut, Kansas, Missouri, Nebraska, New Mexico, Rhode Island, and Utah—have high-income thresholds for taxing benefits, so even if you are a resident, your benefits may not actually be taxed. Depending on your state, you may be able to lower your tax liability based on your income level or deductions. For instance:

  • Minnesota: Taxpayers may be able to apply a benefit subtraction based on certain income limits. Married couples filing jointly may qualify for a $5,240 subtraction if they earn less than $79,480 while single filers and heads of households may qualify for $4,090 if they earn less than $62,090. Married couples filing separately who earn less than $39,740 may claim a $2,620 subtraction.
  • North Dakota: You can deduct taxable benefits if your federal adjusted gross income (AGI) falls below $50,000 (single filers) or $100,000 (married filing jointly).
  • Vermont: The state has a partial or full exemption for Social Security benefits for individuals who fall below certain income thresholds. This is a tiered system for income below $34,000 for single individuals or $44,000 for married couples filing jointly.

The other 37 have no state income tax or fully exempt Social Security benefits. West Virginia passed a law exempting Social Security from personal income over a three-year period beginning in 2020. Taxes would be eliminated by 35% in 2020 and by 65% in 2021. Social Security benefits will be fully exempted from state taxes as of the 2022 tax year.

The Bottom Line

If you’re looking forward to retirement, there are a lot of things you’ll need to consider, including how you’ll earn income. If you’ve paid into the program for at least 10 years, you may qualify for Social Security benefits. But remember—you’ll have to pay taxes on these benefits because they count as income. That’s on top of any other income you may earn. If you have any questions about whether your Social Security benefits are taxable, talk to a certified public accountant (CPA) or tax advisor who can run the numbers for you.

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