Taxation of Social Security benefits

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Flag of the United States.svg.png This article contains details specific to United States (US) investors. It does not apply to non-US investors.

Since the passage of the 1983 Amendments to the Social Security Act[1] 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.[2][note 1] 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.[3]

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.)[4]

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.[5]

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.[6]

See also: Derivation of tax rate boundaries for Social Security taxation

Examples

The examples below are based on tax numbers for 2023.[note 2] 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).

Non-SS Income Taxable SS Adjusted gross income Taxable income Tax bracket Additional SS taxed for each $1 income Marginal tax rate
12,500 0 12,500 0 0% 0.50 0%
14.633 1,067 15,700 0 10% 0.50 15%
21,500 4,500 26,000 10,300 10% 0.85 18.5%
21,879 4,822 26,701 11,001 12% 0.85 22.2%
40,108 20,317 60,425 44,725 22% 0.85 40.7%
41,206 21,250 62,456 46,756 22% 0 22%

In graphical form [7], assuming the non-SS income comes from tIRA withdrawals,
SS single tax.png

Married taxpayers

If you are a married couple, receive $50,000 in Social Security benefits and no other income except as described below:

  • None of your benefits are taxable if your other income is less than $7,000.
  • For every dollar between $7,000 and $19,000, an additional 50 cents becomes taxable.
  • For every dollar over $19,000, an additional 85 cents becomes taxable, up to a total other income of $61,941, which makes the maximum $42,500 taxable.

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

Non-SS Income Taxable SS Adjusted gross income Taxable income Tax bracket Additional SS taxed for each $1 income Marginal tax rate
7,000 0 7,000 0 0% 0.50 0%
19,000 6,000 25,000 0 0% 0.85 0%
22,081 8,619 30,700 0 10% 0.85 18.5%
33,973 18.727 52,700 22,000 12% 0.85 22.2%
61,941 42,500 104,441 73,741 12% 0 12%
77,650 42,500 120,150 89,450 22% 0 22%

In graphical form [7], assuming the non-SS income comes from tIRA withdrawals,
SS Married Tax.png


If you are a married couple, receive $70,000 in Social Security benefits, and $20,000 in qualified dividends (QD) in addition to what is described below:

  • 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.

Other Income Taxable SS AGI Taxable income Taxable OI Taxable QD OI bracket QD bracket Add'l SS taxed per $1 OI Add'l QD taxed per $1 OI Marginal tax rate
0 15,350 35,350 4,650 0 0 0% 0% 0.85 0 0%
8,300 22,405 50,705 20,005 5 0 10% 0% 0.85 0 18.50%
20,189 32,511 72,700 42,000 22,000 0 12% 0% 0.85 0 22.20%
45,730 54,221 119,951 89,251 69,251 1 12% 15% 0.85 1 49.95%
51,941 59,500 131,441 100,741 80,741 11,491 12% 15% 0 1 27.00%
60,451 59,500 139,951 109,251 89,251 20,000 12% 15% 0 0 12.00%
60,651 59,500 140,151 109,451 89,451 20,000 22% 15% 0 0 22.00%

In graphical form [7], 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:

SS Married marginal rates chart2.png

There is no 40.7% rate in either of the above situations 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.

Marginal Tax Rate vs. Social Security and non-Social Security Income, 2023 Single Filers
Marginal Tax Rate vs. Social Security and non-Social Security Income, 2023 Married Joint Filers

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:

Filing Status 22% Threshold Standard Deduction Social Security Other Income
Single $44,725 $15,700 $23,496 $40,454
Married Joint $89,450 $30,700 $61,636 $67,759

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:

Filing Status 22.2% Bump Begins 22.2% Bump Ends
Single $34,000 - 0.5 * SS $28,706 + 0.5 * SS
Married Joint $45,459 - 0.2297 * SS $36,941 + 0.5 * SS

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:

Filing Status 40.7% Bump Begins 40.7% Bump Ends
Single $45,851 - 0.2297 * SS $28,706 + 0.5 * SS
Married Joint $81,919 - 0.2297 * SS $36,941 + 0.5 * SS

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

Figure 1.

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:

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.[14]
  • Connecticut: Allows taxpayers to totally exempt social security from state income tax if income is less than $60,000 (joint filers).[15]
  • Iowa: In 2013 exempts a certain portion of benefits from income tax. In 2014 the exemption will increase to 100%. [16]
  • Kansas: Exempts social security benefits from state taxation if federal adjusted income is less than $75,000.[17]
  • Missouri: Allows taxpayers with adjusted gross income of less than $100,000 (joint filers) to deduct all social security benefits from income.[18]
  • 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.[19]
  • New Mexico : Benefits are taxable, but a person can qualify for an exemption if he or she is 65 years of age or older.[20]
  • 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.[21]

Notes

  1. ↑ Calculation of taxable benefits is done in two steps. First, Worksheet A is used to determine if your benefits are taxable. If so, Worksheet 1 through 4 (select one based on filing method) is used to calculate the tax.
  2. ↑ Tax bracket is based on Taxable income from "IRS provides tax inflation adjustments for tax year 2023". Internal Revenue Service. Retrieved October 22, 2022.

See also

References

  1. ↑ "SUMMARY of P.L. 98-21, (H.R. 1900) Social Security Amendments of 1983-Signed on April 20, 1983". Social Security. Retrieved 31 January 2015.
  2. ↑ IRS Publication 915 PDF or Online
  3. ↑ Bogleheads' Guide to Retirement Planning, Chapter 11; this is the main reference for the formulas above, as it is much easier to follow than the IRS guide.
  4. ↑ IRS Publication 915, Social Security and Equivalent Railroad Retirement Benefits
  5. ↑ IRS Publication 915, Social Security and Equivalent Railroad Retirement Benefits
  6. ↑ IRS Publication 915, Social Security and Equivalent Railroad Retirement Benefits
  7. ↑ 7.0 7.1 7.2 The MMM Case Study Spreadsheet, The Mr. Money Mustache Community, viewed Dec. 23, 2022.
  8. ↑ Taxes by State, Minnestota, retirementliving.com,
  9. ↑ Taxes by State, Nebraska, retirementliving.com,
  10. ↑ Taxes by State, North Dakota, retirementliving.com,
  11. ↑ Taxes by State, Rhode Island, retirementliving.com,
  12. ↑ Taxes by State, Vermont, retirementliving.com,
  13. ↑ Taxes by State, West Virginia, retirementliving.com,
  14. ↑ Taxes by State, Colorado, retirementliving.com,
  15. ↑ Taxes by State, Connecticut, retirementliving.com,
  16. ↑ Taxes by State, Iowa, retirementliving.com,
  17. ↑ Taxes by State, Kansas, retirementliving.com,
  18. ↑ Taxes by State, Missouri, retirementliving.com,
  19. ↑ Taxes by State, Montana, retirementliving.com,
  20. ↑ Taxes by State, New Mexico, retirementliving.com,
  21. ↑ Taxes by State, Utah, retirementliving.com,

External links

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