How Are Social Security Benefits Taxed?
This blog has traditionally focused on early retirement. As such, we haven’t given Social Security the attention it probably deserves.
Social Security benefits are crucial for most retirees. Even for early retirees with sizable portfolios, Social Security benefits can provide a substantial and important portion of retirement income.
In the past we’ve explored how retiring early impacts Social Security benefits and when to claim Social Security benefits.
An important aspect that we haven’t addressed is the taxation of Social Security benefits. You need to understand how much of your stated benefit you will actually receive after taxes to effectively plan retirement income.
This will be instructive to many readers who have strong opinions one way or the other about the future of Social Security. The policy of this blog has always been to avoid speculation about what may happen in the future.
However, you don’t have to speculate to understand how Social Security is taxed. You will see that taxes on this benefit are already effectively increasing every year. As a result, after-tax benefits are already getting smaller for many people….
How Is Social Security Taxed?
Social Security benefits are taxed the same whether they are retirement, survivor, or disability benefits. Those with the lowest incomes do not have their Social Security benefit taxed at all.
As income increases above a defined threshold, 50% of your benefit becomes taxable. Those with the highest income are required to pay tax on 85% of their Social Security benefits. The thresholds are dependent on your filing status.
Benefits are not taxable if total provisional income is less than $32,000 for those married filing jointly. 50% of benefits are taxable if income is over $32,000 up to $44,000. If income is greater than $44,000, then 85% of your Social Security benefits are taxable.
Benefits are not taxable if total provisional income is less than $25,000 for those using the single filing status. 50% of benefits are taxable if income is between $25,000 and $34,000. If income is greater than $34,000, 85% of your Social Security benefits are taxable.
The taxation of Social Security benefits is not favorable for those utilizing the married filing single status. 85% of benefits are taxable regardless of income.
Unless you have a compelling reason to use the married filing single status, it is important to understand what counts as provisional income for the purposes of determining Social Security taxation.
What is Provisional Income?
Provisional income determines how much of your Social Security is taxed. Calculate provisional income by adding three components:
Adjusted Gross Income (excluding Social Security benefits) + Tax-exempt income + 50% of Social Security benefits received.
That is simple enough. But it is important to understand a bit of the history of Social Security taxation.
Understand how and when these thresholds were developed. This illustrates why more of us will be pushed above the thresholds over time, decreasing our actual after-tax benefit.
A Brief History of Social Security Tax
Social Security began in 1935. Since that time it has undergone many changes. One of the most significant was the taxation of benefits.
Find a detailed history of the taxation of Social Security from the SSA website here. My abbreviated history will provide the key pieces of information you need to better understand your benefits.
From Social Security’s inception until 1983, Social Security benefits were not taxed. A 1983 law made up to 50% of Social Security benefits taxable if income exceeded certain thresholds.
The 1983 law set the thresholds at $25,000 for single filers and $32,000 for married filers. If those numbers look familiar, they are the same lower thresholds that are still in place today, four decades later.
In 1993, further changes to the law made up to 85% of Social Securities benefits taxable. That 1993 law set the income threshold at $34,000 for single filers, and $44,000 for those that use the married filing jointly status. If those numbers look familiar, they too are the same thresholds that are in place today, three decades later.
The Hidden Annual Tax Increase on Social Security Benefits
There is a common feature of almost every aspect of our tax system. Numbers are adjusted, or at least considered for adjustment, annually for inflation. As an example, the contribution limits and income cutoffs for retirement accounts and key tax credits increased in response to high inflation in 2022. Standard deductions and tax brackets also increased substantially.
Social Security benefits likewise got a considerable bump, increasing 8.7% over 2022 amounts. But the threshold amounts that determine how much of your Social Security benefit is taxed have not changed. The lower and upper thresholds are exactly the same as they were four and three decades ago, respectively.
In essence, not adjusting these thresholds for inflation is a hidden annual tax increase on these important benefits. When benefits were first taxed in 1983, the law only impacted about 10% of recipients. Recent research estimates that over 50% of recipient’s now have their Social Security benefits taxed.
I would suspect that number will be close to 100% of the readership of this blog. As with all aspects of personal finance, it is important to understand the rules that apply to you and plan accordingly.
Related: Early Retirement Tax Planning 101
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[Chris Mamula used principles of traditional retirement planning, combined with creative lifestyle design, to retire from a career as a physical therapist at age 41. After poor experiences with the financial industry early in his professional life, he educated himself on investing and tax planning. After achieving financial independence, Chris began writing about wealth building, DIY investing, financial planning, early retirement, and lifestyle design at Can I Retire Yet? He is also the primary author of the book Choose FI: Your Blueprint to Financial Independence. Chris also does financial planning with individuals and couples at Abundo Wealth, a low-cost, advice-only financial planning firm with the mission of making quality financial advice available to populations for whom it was previously inaccessible. Chris has been featured on MarketWatch, Morningstar, U.S. News & World Report, and Business Insider. He has spoken at events including the Bogleheads and the American Institute of Certified Public Accountants annual conferences. Blog inquiries can be sent to chris@caniretireyet.com. Financial planning inquiries can be sent to chris@abundowealth.com]
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Here’s a formula I’ve used to get a quick answer for the amount of social security that is taxed. It agrees with on-line calculators and thus appears to work.
Lesser of (1) or (2)
(1) Provisional income minus 1st base x 50% = xxx
Provisional income minus 2nd base x 35% = xxx
Total xxx
(2) 85% of social security benefits if provisional income exceeds both base amounts, or 50% of
social security benefits if provisional income exceeds only the 1st base amount
I found the following calculators that seemed to give appropriate answers, but I’m not yet on social security to verify. I received almost the same answer with both, but the since IRS calculator asks a lot more questions, I liked the second site for it’s simplicity:
https://www.irs.gov/help/ita/are-my-social-security-or-railroad-retirement-tier-i-benefits-taxable
https://www.covisum.com/resources/taxable-social-security-calculator
Projecting my future tax liability with social security is important in determining whether or not to do IRA to Roth conversions. Bumping the social security tax liability for 50% to 85% becomes significant in my decision making process.
Just a note for those who might be looking for information on government websites: the SSA uses the term “combined income” rather than “provisional income.”
Your statement “As income increases above a defined threshold, 50% of your benefit becomes taxable” implies a “cliff” situation—that is, if your income is $1.00 over the threshold, then 50% of all your benefit becomes taxable. Although I haven’t checked Terry Flick’s formulas against my previous tax return, his formulas seem closer to what I experienced when I filed my 2021 taxes (the first year I received SS).
The IRS and SS documents say that “up to 50%” (and “up to 85%) of your benefits become taxable. If you go over the first base just a little, you are taxed only on the amount you went over.
Also of interest I believe that 100% of your social security is included in the MACRI calculation to adjust your medicare premiums as your income moves up…so this can also cause significant expense increase if you do not watch both your tax bracket and your MACRI bracket!
It’s interesting to understand the “propaganda” presented to the American people to justify the taxation of Social Security benefits. I had always thought that taxing Social Security was double taxation since we pay taxes on our contributions when working and then tax again on withdrawing. However, according to the justification for these taxes, the 50% taxation passed in 1983 was to tax Americans working for a company, on the employer’s contributions which a company writes off as an expense. The 85% taxation passed in 1993 was justified because of the projected earnings off of those contributions. It was calculated that a recipient’s initial contributions (employee pays 50% and employer pays 50%) were worth 15% of the average social security benefits over their lifetime. Whether you agree or disagree, that’s how they arrived at the numbers and “justified” it. However, the flaw in this is the provisional income thresholds have never been adjusted for inflation over the past 4 decades. You can find more info here: https://www.ssa.gov/policy/docs/issuepapers/ip2015-02.html
You article is too simple:
“Benefits are not taxable if total provisional income is less than $32,000 for those married filing jointly. 50% of benefits are taxable if income is over $32,000 up to $44,000. If income is greater than $44,000, then 85% of your Social Security benefits are taxable.”
Key Words are “up to 50%” and “up to 85%”. There are two calculations that are performed, and you need to look at the details. Below is a good website that may help you understand the calculations.
https://www.moneyhelpcenter.com/taxes/calculate/much-social-security-benefit-may-taxed/#results