Social Security benefits, which offer a safety net to guarantee financial stability throughout your golden years, are essential to the retirement plans of many Americans. However, are Social Security benefits taxable?

Let’s examine the intricacies of Social Security benefits and the possible tax ramifications.

Are Social Security benefits taxed?

Certainly, depending on your overall income from all sources (including Social Security) and your overall income from other sources, your payments may be liable to federal income taxes. Your marital status and annual combined income both have a major impact on how much of your benefits are taxable. Furthermore, although the majority of states do not tax Social Security benefits, there are several that have particular guidelines and income limitations that may have an impact on how these benefits are taxed.

Understanding Social Security benefits

The purpose of Social Security benefits is to provide retired workers, their surviving spouses, and people with disabilities with financial support. Payroll taxes are used to support these benefits, which give people who paid Social Security taxes on their income a source of retirement income.

The main factor determining your eligibility for Social Security payments is your employment history. Over time, you gain “credits” based on your wages; most people need 40 credits, or roughly ten years of work, to be eligible for benefits. Your average salary during your working years is correlated with the amount of Social Security income you get. Your retirement benefits will increase in proportion to your income while working.

You can register for a “my Social Security” account on the Social Security Administration’s website to receive an estimate of your individual benefit. You can play around with different retirement age scenarios to see how it might affect your Social Security income, and they have a tool to assist you estimate your payouts.

Different Social Security benefits are available, such as retirement benefits, disability benefits, survivor benefits for children and spouses, and Supplemental Security Income (SSI) for low-income people. See this Social Security Administration handbook for comprehensive details on each type.

The Social Security tax: How benefits are funded

The Federal Insurance Contributions Act (FICA) mandates that your employers deduct the Social Security and Medicare taxes from your income.

The Social Security tax burden is shared by employers and employees, who each pay a 6.2% tax rate, for a total tax rate of 12.4%. Individuals who work for themselves are required by the IRS to file quarterly estimated taxes, which includes paying the full 12.4% Social Security tax rate.

The amount of your income that is subject to Social Security tax is limited by the federal government. The maximum Social Security tax amount in 2023 will be $9,932.40, with a $160,200 Social Security tax cap. In 2024, the highest tax amount will be $10,453.20 due to the Social Security tax cap rising to $168,600.  Any income above that threshold is not subject to FICA taxes.

Taxation of Social Security benefits

Your total income, which includes money from sources other than Social Security, determines how much tax you must pay on your benefits.

Many people’s retirement benefits are taxed by the federal government, while other benefits are free from taxes. In general, you’ll earn a higher exemption the smaller your retirement income is.

The government looks at two factors to calculate the portion of your Social Security income that is taxable:

• Your combined yearly income: This includes any tax-exempt interest you get, half of your Social Security benefits, and your adjusted gross income (AGI), which includes any income from earnings, capital gains, retirement plan distributions, pension payments, and other sources.
• Your marital situation: Your taxable limit will be higher if you are married.

Eleven states—Colorado, Connecticut, Kansas, Minnesota, Missouri, Montana, Nebraska, New Mexico, Rhode Island, Utah, and Vermont—tax Social Security, but the majority of states do not. It is advisable to conduct thorough study to ensure that you are aware of the income thresholds and taxation regulations specific to your state before filing your taxes.

SSI is not subject to taxes. Those who are blind, 65 years of age or older, or who meet certain disability requirements and have little resources are eligible for this assistance.

Income thresholds and taxation rates

Once your taxable income for the year exceeds $25,000 (or $32,000 if you file jointly as a married couple), you will have to start paying taxes on your Social Security benefits.

The amount of tax due is determined by the extent of your overage:

• Up to 50% of your benefits as an individual making between $25,000 and $34,000 can be subject to taxes. You can be required to pay income taxes on up to 85% of your benefits if your income exceeds $34,000.
• Up to 50% of your benefits as a married joint filer making between $32,000 and $44,000 could be subject to taxation. You can be required to pay income taxes on up to 85% of your benefits if your income exceeds $44,000.

Strategies to minimize Social Security taxes

You might be able to lower your tax obligation on Social Security benefits in specific circumstances. The easiest method to accomplish this is to keep your total earned income within the previously indicated taxable limits, but you may also want to think about the following other approaches:

• Make use of Roth accounts: Withdrawals from a Roth IRA or Roth 401(k) are tax-free as contributions to Roth accounts are made using after-tax money. As a result, Roth withdrawals won’t raise the amount of tax due on your Social Security payments or have an impact on how much your taxable income is calculated.
• Maximize taxable income prior to retirement: Some persons choose to raise their taxable income prior to retirement in order to reduce their taxable income while receiving Social Security benefits. To achieve this, you can withdraw funds from a tax-favored retirement account, such as a 401(k) or conventional IRA. When you become 59½, you can take withdrawals from these accounts without incurring penalties. The idea is to pay less tax by taking these withdrawals prior to the commencement of your Social Security payments, but keep in mind that you still have to pay income tax on the amount you take out of these accounts. Early withdrawals may also enable you to postpone filing for Social Security benefits, which will result in larger benefits.

As always, you can customize these tactics or get more approaches for your unique tax position by speaking with a financial expert. Everybody’s retirement planning is different, so it’s important to weigh all the options when determining how much to withdraw and when.

How to report Social Security income on tax returns

Form SSA-1099 is usually used to record Social Security income on your federal tax return. This form details all of your monthly Social Security benefits—retirement, survivor, and disability—that you were awarded throughout the tax year. Your SSI benefits won’t be counted as they aren’t taxable.

Navigating the taxation of Social Security benefits can seem overwhelming at first, but don’t forget that PSA CPA can help you accurately report your Social Security income, allowing you to file with confidence.