Taxation of Social Security benefits

🇺🇸

Since the passage of the 1983 Amendments to the Social Security Act Social Security benefits are subject to taxation.

The amount of Social Security income which is taxable depends on your Social Security income and your other income. Most high-income retirees will have 85% of Social Security benefits taxable. For lower-income retirees, less than 85% will be taxable, but many retirees in a 12% tax bracket will face a marginal tax rate much higher than 12%. Social security benefits are also taxable in some states (see Figure 1.)

For social security taxes imposed on earned wages, see the Payroll tax article.

The formula
The full rules are in IRS Publication 915. This simplification covers most cases; there are special rules if you contribute to a Traditional IRA, receive retroactive payments for prior years, or file forms to exempt other income from taxation.

The relevant income for Social Security taxation includes all items which are normally part of your adjusted gross income, plus tax-exempt interest income, plus 50% of your Social Security benefits. (Historically, the 50% represents the fact that half of your Social Security contributions were made by your employer and thus not taxed.)

There are two relevant base amounts; unlike most income limits in the tax code, they are not adjusted for inflation. The lower base is $25,000 if you are single, $32,000 if married filing jointly. The upper base is $34,000 if you are single, $44,000 if married filing jointly.

If your relevant income is below the lower base, none of your benefits are taxable. For every $1 of relevant income between the lower and upper bases, 50 cents of your Social Security benefits become taxable, up to 50% of your total benefits. For every $1 of relevant income above the upper bases, 85 cents of your Social Security benefits become taxable, up to a total taxable amount of 85% of your benefits.

Examples
The examples below are based on tax numbers for 2023. They illustrate how tax brackets and Social Security taxation interact, creating a 22.2% marginal tax rate for most taxpayers in the 12% tax bracket, and a 40.7% marginal tax rate for

- single taxpayers 65 and older with SS benefits above $23,496; at that SS, the marginal tax rate begins at ordinary income of $40,453;

- married taxpayers 65 and older with SS benefits above $61,636; at that SS, the marginal tax rate begins at ordinary income above $67,759.

Single taxpayers
If you are single and receive $25,000 in Social Security benefits:
 * None of your benefits are taxable if your other income is less than $12,500.
 * For every dollar between $12,500 and $21,500, an additional 50 cents becomes taxable.
 * For every dollar over $21,500, an additional 85 cents becomes taxable, up to a total other income of $41,206, which makes the maximum $21,250 taxable.

The table below assumes that you take the 2023 standard deduction ($15,700 for a taxpayer over 65).

In graphical form, assuming the non-SS income comes from tIRA withdrawals,



Married taxpayers
If you are a married couple and receive $70,000 in Social Security benefits, and $20,000 in qualified dividends (QD):
 * With no other income (OI), 22% of your SS benefits are already taxable, and $4,650 QD is taxable. You don't owe federal tax, due to the standard deduction and the 0% bracket for qualified dividends.
 * For every $1 of OI (e.g., Roth IRA conversion) between $0 and $8,299, an additional $0.85 of SS becomes taxable, but the federal tax remains $0.
 * For every $1 of OI between $8,300 and $20,188, an additional $0.85 of SS becomes taxable. The OI bracket rate is 10%, so the actual marginal tax rate is 1.85 * 10% = 18.5%.
 * For every $1 of OI between $20,189 and $45,729, an additional $0.85 of SS becomes taxable. The OI bracket rate is 12%, so the actual marginal tax rate is 1.85 * 12% = 22.2%.
 * For every $1 of OI between $45,730 and $51,940, an additional $0.85 of SS and $1 of QD becomes taxable. The OI bracket rate is 12% and the QD bracket rate is 15%, so the actual marginal tax rate is 1.85 * (12% + 15%) = 49.95%.
 * For every $1 of OI between $51,941 and $60,450, an additional $1 of QD becomes taxable. The OI bracket rate is 12% and the QD bracket rate is 15%, so the actual marginal tax rate is 12% + 15% = 27%.
 * For every $1 of OI between $60,451 and $60,650, you are merely in the 12% OI bracket with no unusual marginal rate changes.
 * For every $1 of OI over $60,650, you are merely in the 22% OI bracket with no unusual marginal rate changes until IRMAA affects things.

The table below assumes that you take the 2023 standard deduction ($30,700 for a married couple over 65).

"Taxable income" is what appears on line 15 of the 2022 Form 1040.

"Taxable OI" and "Taxable QD" are from line 5 and line 12 calculations on the 2022 Qualified Dividends and Capital Gain Tax Worksheet, p. 36 of the 2022 Form 1040 Instructions.

In graphical form, assuming the OI comes from taxable IRA withdrawals, and starting the marginal rate calculations at $0 withdrawn:



If you have already made a $45K taxable IRA withdrawal (converted to Roth or not) and are considering a larger amount for the year, the marginal rates for amounts between $45K and $70K are shown here:



There is no 40.7% rate in this situation because the example couple reaches the maximum taxable SS benefit amount well before reaching the 22% tax bracket.

Heat map representation
Plotting marginal tax rates as a function of Social Security income (horizontal axis) and non-Social Security income (vertical access) gives the following "heat map" style plots.





The central point on each plot above which 40.7% marginal rates become possible can be calculated directly the formulas that describe taxation of Social Security, described above. As of 2023, these values are:

Taxpayers earning less Social Security income than these values are possibly affected by the 22.2% bump. As a function of annual Social Security benefit (SS), the 22.2% bump begins and ends at the following levels of income from other sources:

Taxpayers earning more Social Security income than the above values are possibly affected by the 40.7% bump. As a function of annual Social Security benefit (SS), the 40.7% bump begins and ends at the following levels of income from other sources:

See the Tax analysis page for a derivation of these formulas.

Examples
A single taxpayer receiving $25,000 of Social Security benefits would be possibly affected by the 40.7% bump because the amount is more than $23,496. The 40.7% bump begins at $40,108 ($45,851- 0.2297 * $25,000) and ends at $41,206 ($28,706 + 0.5 * $25,000). These values agree with the above charts within $1.

Married taxpayers receiving $50,000 of Social Security benefits would be possibly affected by the 22.2% bump, but not the 40.7% bump, because the amount is less than $61,636. The 22.2% bump begins at $33,973 ($45,459 - 0.2297 * $50,000) and ends at $61,941 ($36,941 + 0.5 * $50,000). These values also agree with the above charts within $1.

State taxation
While most states do not tax social security benefits (shaded blue in figure; along with green shaded states which do not impose income tax), six states tax benefits to the extent they are taxed at the federal level (shaded lavender), while eight states exempt social security benefits from taxation subject to limits (shaded yellow).

The states that tax benefits to the extent they are taxed at the federal level include:
 * Minnesota
 * Nebraska
 * North Dakota
 * Rhode Island
 * Vermont
 * West Virginia

The states that tax social security benefits subject to limits include:
 * Colorado: If a household meets certain age requirements qualifying retirement income can be excluded from income if it is taxable under federal income tax.
 * Connecticut: Allows taxpayers to totally exempt social security from state income tax if income is less than $60,000 (joint filers).
 * Iowa: In 2013 exempts a certain portion of benefits from income tax. In 2014 the exemption will increase to 100%.
 * Kansas: Exempts social security benefits from state taxation if federal adjusted income is less than $75,000.
 * Missouri: Allows taxpayers with adjusted gross income of less than $100,000 (joint filers) to deduct all social security benefits from income.
 * Montana: Some social security benefits may be taxable (state advises filling out a worksheet); in general if total income is below $32,000 joint filers, benefits will not be subject to tax.
 * New Mexico : Benefits are taxable, but a person can qualify for an exemption if he or she is 65 years of age or older.
 * Utah: If a household meets certain age requirements qualifying retirement income can be offset by credit, which is phased out once income exceeds a certain level.