Understanding Tax on Social Security Benefits

Receiving Social Security benefits is advantageous in retirement, but like many other forms of income, these benefits can be subject to tax by the Federal Government. To accurately predict your retirement income (and taxes), it’s important to understand how Social Security benefits are taxed.

How are Social Security Benefits Taxed?

While Social Security Income makes up a significant amount of income for many retirees, a portion of these benefits may be subjected to federal income taxes. The Internal Revenue Service (IRS) uses a formula—known as the provisional income formula—to determine taxable income.1

Provisional Income Formula

An individual’s provisional income is calculated by adding together their adjusted gross income (Federal AGI), their nontaxable interest, and one-half of their Social Security benefits. The resulting amount is compared to a specific income threshold to determine the portion of the benefits that will be subject to taxation and added to taxable income. Note that other passive income, including pension income and annuity income, are also counted towards taxable income at the federal level.

Taxation Thresholds

The thresholds that determine whether Social Security benefits are taxable are as follows:2

  • Single filers with a provisional income between $25,000 and $34,000 may have up to 50% of their social security benefits subject to federal income tax.
  • Single filers with a provisional income exceeding $34,000 may have up to 85% of their social security benefits subject to federal income tax.
  • Couples married filing jointly with a provisional income between $32,000 and $44,000 may have up to 50% of their social security benefits subject to federal income tax.
  • Couples married filing jointly with a provisional income exceeding $44,000 may have up to 85% of their social security benefits subject to federal income tax.

It’s important to note that these thresholds are not adjusted for inflation, which means that the benefits of more retirees may become subject to taxation over time as the cost of living rises. 

State Taxes on Social Security Benefits

In addition to federal taxes, some states also impose state income taxes on Social Security benefits. However, the rules and exemptions vary from state to state. Currently, twelve states tax Social Security benefits to some extent at the state level, including Montana, Rhode Island, New Mexico, and West Virginia.3

Strategies to Minimize Social Security Taxes

There are several strategies that you can implement to potentially reduce the taxes on your Social Security benefits. Here are a few:

Diversify Your Retirement Income

Diversify your sources of income during retirement. By relying on a combination of Social Security benefits, retirement savings, and other investments, you may be able to reduce your provisional income and lower your tax liability. Having multiple forms of retirement income creates diversification for tax purposes and maximizes the amount of your social security payments.

Consider Delaying Benefits

Delaying your Social Security benefits can increase the amount of your monthly payment. This strategy can also help you push back the taxation of your Social Security benefits if you anticipate being in a higher tax bracket in the future. If you have reached full retirement age, you are also not subject to the Retirement Earnings Test which can reduce the amount of your Social Security payments in that tax year. Currently, the income level for reducing Social Security benefits is $22,320 and is adjusted annually for inflation.

Create a Withdrawal Strategy

Strategically managing withdrawals from your retirement accounts can help optimize your tax situation. By taking distributions from taxable accounts instead of tax-deferred accounts, you can potentially minimize your provisional income and reduce the taxation of your Social Security benefits.

Understand State Tax Laws

If you live in a state that taxes Social Security benefits, familiarize yourself with the rules and exemptions that are specific to your state. Consulting with a tax professional can provide valuable advisory services into how to minimize your state taxes. You may also want to take the different state tax laws into account when you are deciding where you will live when you retire. Other local and state taxes, such as property taxes, can potentially be higher and offset any other tax savings you may be anticipating.

While paying taxes may not always be an enjoyable endeavor, the good news is that planning for the inevitable will help to alleviate some of the stress or surprise of an unexpected tax bill. And understanding how your benefits will be taxed will help you form an accurate retirement income planning strategy to help you fully enjoy your golden years.

Spiritual Application

In his later years of life, Solomon reflected much on the patterns of life and gave wise counsel on how to prepare for all of the unknown events that we might, and in many cases should expect, to encounter. In Ecclesiastes 11:6(NLT), he wrote, “Plant your seed in the morning and keep busy all afternoon, for you don’t know if profit will come from one activity or another—or maybe both.” 

There are many uncertainties in life that we will never be fully prepared for, and we can only continue doing all that we know how to do, in both our natural and spiritual lives. However, just a farmer who continues planting his fields year after year, we too should continue planting so as to create a harvest that we will be able to reap. It is only when we stop planting that we will stop reaping. But, on the contrary, if we continue planting, we can expect to see our efforts produce a bountiful harvest. 

Evergreen Financial Group is a Fee-Only Financial Planning and Investment Firm located in Billings, MT serving clients in Montana, Wyoming, Utah, and virtually across the country. Evergreen Financial Group specializes in working with Christian families, including Young Professionals, Current and Future Retirees and Church Staff Members. 

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  1. https://www.thrivent.com/insights/social-security/how-does-provisional-income-impact-social-security-benefits#
  2. https://www.ssa.gov/benefits/retirement/planner/taxes.html
  3. https://www.aarp.org/retirement/social-security/questions-answers/which-states-do-not-tax-social-security-benefits.html

This content is developed from sources believed to be providing accurate information. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security. Evergreen Financial Group, LLC is a registered investment advisor offering advisory services in Montana and in other jurisdictions where exempted. Registration does not imply a certain level of skill or training. This communication is for informational purposes only and is not intended as tax, accounting or legal advice, as an offer or solicitation of an offer to buy or sell, or as an endorsement of any company, security, fund, or other securities or non-securities offering. This communication should not be relied upon as the sole factor in an investment making decision. All opinions and estimates constitute Evergreen Financial Group’s judgement as of the date of this communication and are subject to change without notice. Evergreen Financial Group does not warrant that the information will be free from error. The information should not be relied upon for purposes of transacting securities or other investments. Your use of the information is at your sole risk.