Not many forms of income escape taxation by the Internal Revenue Service, and Social Security benefits are no exception. Most forms of Social Security income are taxable income, but you might dodge the bullet based on your overall income, and you won’t pay tax on all your benefits.
Taxable Social Security Benefits
The Social Security Administration pays out a variety of benefit types. Taxpayers might receive retirement benefits, spousal benefits, disability benefits, survivor benefits, or Supplemental Security Income (SSI) benefits. SSI isn’t taxable, but the other benefits are not tax-frees.
They’re only subject to income tax, however – not additional Medicare and Social Security taxes.
Social Security Benefits and Other Income
The key to whether your benefits are taxable and how much is taxable depends on your other sources of income. The IRS provides a relatively simple equation to help you figure it out. The tricky part is that virtually all the income that comes into your household must be included, including dividends, interest, capital gains, pensions, retirement income, wages, salaries and self-employment income. But you’re not going to use the entirety of all these earnings and incomes in your calculation.
Taxation of benefits is based on your adjusted gross income or AGI, not your gross or overall income, plus any tax-exempt interest income you earned during the course of the tax year. You have to start your tax return to determine your AGI. It appears on line 11 of your 2020 Form 1040 tax return. Arriving at this number involves completing Schedule 1 to list any types of income that don’t have their own dedicated spot on the 1040. You also subtract any adjustments to income that you qualify for on Schedule 1, and this reduces your AGI.
Read More: What Is the Average Retired Couple's Income?
How to Calculate the Taxable Amount
Add your tax-exempt interest and one-half of your Social Security benefits to your AGI to arrive at what the IRS calls your “combined income.” Let’s say your AGI is $25,000. You collected $17,000 in Social Security benefits, and one-half of that is $8,500. You earned no tax-exempt interest. The number you’re working with is, therefore, $33,500: $25,000 plus $8,500.
This number falls between $25,000 and $34,000, so you have to pay taxes on 50 percent of your Social Security benefits if you are a single taxpayer filer. You would have to pay taxes on 85 percent of your benefits if your combined income was $34,000 or more. But if your combined income was just $24,999, or less than $25,000, you wouldn’t have to pay income tax on any of your benefits.
The numbers shift a bit for married couples if you file a joint return with your spouse. The 50 percent threshold falls between $32,000 and $44,000. The 85 percent threshold kicks in at $44,001. But an unfortunate rule applies to this filing status: You must use your joint AGI, comprised of both of your earnings, even if only one spouse is collecting Social Security benefits.
This rule wouldn’t apply, however, if you lived apart from your spouse throughout the entirety of the tax year and you file a separate married return. In this case, you would use the thresholds for the single filing status. But you would have to pay tax on all your benefits if you did live together and you file a separate married return. That $25,000 or $32,000 threshold drops to $0 in this case.
This Isn’t Your Tax Rate
This doesn’t mean you’ll pay a 50 or 85 percent tax rate on your Social Security benefits. It means that this portion of your benefits is subject to income tax. You would owe tax on $14,450 of your Social Security benefits if they totaled $17,000 for the year and you fell into the 85 percent category, or you'd owe on $8,500 of your benefits if you fell into the 50 percent category.
The Social Security Administration sends you a Form SSA-1099 sometime in January, telling you how much in the way of benefits you were paid in the previous year.
When Your Child Has Other Income
The same basic equation applies if your child receives survivor or dependent Social Security benefits. That money would be taxable according to the same income limits that apply to adults if the child received any other income during the tax year, such as if a teenager held down a job.
On the bright side, you do not have to include your child's benefits with yours when you’re calculating your own tax liability, or your benefits with theirs. You should calculate each of your tax obligations separately.
Lump Sum Payments of Back Benefits
It occasionally happens that a taxpayer receives a lump sum payment of back benefits for previous years. The IRS indicates that you should not amend your previous years' tax returns if this happens. You have two options if this should occur:
The entirety of what you received – back benefits plus the current year’s benefits – can be calculated in the equation to determine if your benefits are taxable in the year you received the money.
You can elect to use your AGI for the earlier, applicable tax year if that will result in a lesser tax obligation. This can be a complicated option, but the IRS provides a worksheet in Publication 915, which you can access online. You might also want to touch base with a tax professional to make sure you get it right.
You have some payment options if it turns out that your Social Security benefits are either 50 or 85 percent taxable. You don’t have to wait until you file your tax return in April, leaving you to scramble to pay additional taxes that you didn’t know you were going to owe.
You can get ahead of the equation by immediately reaching out to the Social Security Administration and arranging to have taxes withheld from your benefits, just as you would have them withheld if you were still working. You can also remit estimated tax payments as the year goes on. Run the numbers so you have a rough idea of what you’ll most likely owe, then send the money to the IRS in advance.
States That Tax Social Security
Unfortunately, there’s a chance that you’ll have to pay a state tax on your Social Security benefits as well, in addition to a federal income tax to the IRS.
According to the AARP, 13 states tax Social Security:
- New Mexico
- Rhode Island
- North Dakota
- West Virginia
Each state has its own rules, so check with your Department of Revenue to find out how it taxes this income. For example, New Mexico and Colorado offer a form of tax deduction that can offset some of what you might owe. You might not have to concern yourself with the issue in tax year 2021 if you live in West Virginia, because effective in tax year 2021, this state has phased out its Social Security tax . It will be officially eliminated as of 2022.
Utah follows the same calculation equation as the IRS, and the income thresholds for Connecticut, Minnesota and Kansas are significantly higher than those at the federal level. Nebraska has rules in place to use only your AGI without adding in half your benefits.
- Social Security Administration: Retirement Benefits
- AARP: How Is Social Security Taxed?
- IRS: Don’t Forget, Social Security Benefits May Be Taxable
- IRS: Social Security Income
- Tax Foundation: Does Your State Tax Social Security Benefits?
- NOLO: Taxes on Social Security Benefits
- IRS: Form 1040 U.S. Individual Income Tax Return 2020
- IRS: Schedule 1 Additional Income and Adjustments to Income 2020
- IRS: Publication 915
- Social Security Administration. "Retirement Benefits," Page 2. Accessed Feb. 19, 2020.
- Internal Revenue Service. "Publication 554: Tax Guide for Seniors," Page 12. Accessed Feb. 19, 2020.
- AARP. "Which States Tax Social Security Benefits?" Accessed Feb. 19, 2020.
- Iowa Legislature. "Senate File 2408 - Enrolled." Accessed Feb. 19, 2020.
- New Mexico Taxation and Revenue Department. "Does New Mexico offer a tax break to retirees?" Accessed Feb. 19, 2020.
Beverly Bird has been writing professionally for over 30 years. She is also a paralegal, specializing in areas of personal finance, bankruptcy and estate law. She writes as the tax expert for The Balance.