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  • W. Scott Hurt, CFP®, CPA

How Social Security Is Taxed

Social Security is an essential component of retirement income and it can comprise a significant portion of your cash flow.

The Social Security Administration (SSA) estimates benefits replace about 40% of pre-retirement income, making it an integral cash flow planning resource.

But all good things come with a cost.

What cost do you have to consider with Social Security?


So, how is social security taxed?

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The answer not only tells you how much of your Social Security check you get to keep but is itself a planning factor since there are strategies to help reduce taxes on your benefits.

Keep reading to learn about the different tax components of social security.

When Will Your Benefits Be Taxed? (And By How Much)

You are subject to federal income taxes on your Social Security retirement, disability, and other benefits as soon as you start receiving them. But not all of your benefits are taxable. This area can get a bit more confusing. Your benefits are taxed as income—but you’re only responsible for the portion of your income the SSA deems taxable.

So how much of your social security benefits does the IRS consider taxable?

It depends on your other income sources. But the income thresholds for taxing Social Security benefits are relatively low.

Do you and your spouse make more than $32,000 combined?

If so, you will likely pay tax on some of your Social Security income. Most filers need to pay tax on benefits if they have multiple retirement income channels like a 401k, traditional IRA, Roth IRA, pension, real estate, earned income, and other investments.

From a federal tax perspective, up to 85% of your benefits may be taxable. Some states also levy state taxes on Social Security income, but Virginia isn’t one of them.

There are only 13 states that tax Social Security benefits: Colorado, Connecticut, Kansas, Minnesota, Missouri, Montana, Nebraska, New Mexico, North Dakota, Rhode Island, Utah, Vermont, and West Virginia.

We’ll look specifically at how your income is calculated in the next section, but for now, it’s helpful to absorb the basic idea that a portion of your benefits are taxed based on your sources of income.

Retirees, understanding the fundamentals allows you to draw a critical connection: the importance of reducing your taxable income in retirement. There are planning decisions to reduce your income calculation to determine your Social Security taxes without reducing your actual income.

To get started, plan ahead for what your tax bill might look like in retirement based on all of your income sources, including Social Security. Doing so helps you make choices now that can lower your taxes and avoid unexpected tax bills come tax season!

How Does The Social Security Administration Calculate Your Income?

Before we look at the formula, understand that it is somewhat complicated to calculate how much of your Social Security is taxable. We recommend using a reliable online calculator through a reputable source or contact your accountant to help you. You can also get a rough estimation by filling out an SSA worksheet.

So how is your income calculated? The Social Security Administration uses a figure they call your “Combined Income.” Your combined income is a combination of:

  • Your Adjusted Gross Income

  • ½ of your Social Security benefit

  • Nontaxable interest such as the interest you receive from municipal bonds.

As an example, say your AGI (which you get from your tax return) is $75,000 and you receive $2,000 in tax exempt interest. You also get a Social Security benefit of $24,000. Your “Combined Income” is 75,000 + 2,000 + 12,000 = $89,000.

So, how is that number used to figure out how much of your benefit is taxable? Assuming you're married filing jointly for the 2021 tax year if your combined income is:

  • Between $32,000 and $44,000, you may have to pay income tax on up to half of your social security benefits.

  • More than $44,000, up to 85 percent of your benefits may be taxable.

In this example, your benefits are 85% taxable. Note that if your combined income is below the lower threshold of $32,000, then your benefits are not taxable. Your filing status influences these thresholds.

Remember that your AGI in retirement is a function of how you take withdrawals from your accounts. You can actively influence it by being deliberate with your savings, thereby reducing taxes in retirement.

For example, withdrawals from a Roth account do not count toward your AGI, while withdrawals from traditional tax-deferred accounts do.

Roth conversions, taking partial withdrawals from different account types, and keeping some of your savings in a taxable account are great ways to reduce your future AGI.