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]

Examples

The examples below are based on tax numbers for 2022.[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 $20,570; at that SS, the marginal tax rate begins at ordinary income of $38,991;
- married taxpayers 65 and older with SS benefits above $55,784; at that SS, the marginal tax rate begins at ordinary income above $64,833.

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 $21,5000, an additional 85 cents becomes taxable, up to a total other income of $41,206, which makes the maximum $17,000 taxable.

The table below assumes that you take the 2022 standard deduction ($14,700 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%
13,967 734 14,701 1 10% 0.50 15%
20,817 4,158 24,975 10,275 12% 0.50 18%
21,500 4,500 26,000 11,300 12% 0.85 22.2%
37,973 18,502 56,475 41,775 22% 0.85 40.7%
41,206 21,250 62,456 47,756 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 and receive $50,000 in Social Security benefits:

  • None of your benefits are taxable if your other income is less than $12,000.
  • 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 $34,000 taxable.

The table below assumes that you take the 2022 standard deduction ($28,700 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 25,000 0 0% 0.85 0%
21,000 7,700 28,700 0 10% 0.85 18.5%
32,108 17,142 49,250 20,550 12% 0.85 22.2%
61,941 42,500 104,441 75,741 12% 0 12%
69,750 42,500 112,250 83,550 22% 0 22%

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

There is no 40.7% rate in this situation because the example couple reaches the maximum taxable 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, 2021 Single Filers 2021
Marginal Tax Rate vs. Social Security and non-Social Security Income, 2021 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 2021, these values are:

Filing Status 22% Threshold Standard Deduction Social Security Other Income
Single $41,775 $14,700 $20,570 $38,991
Married Joint $83,550 $28,700 $55,784 $64,833

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 $43,595 - 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 $43,716 - 0.2297 * SS $28,706 + 0.5 * SS
Married Joint $77,649 - 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 $20,561. The 40.7% bump begins at $37,974 ($43,716- 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 $55,784. The 22.2% bump begins at $32,110 ($43,595 - 0.2297 * $50,000) and ends at $61,941 ($36,941 + 0.5 * $50,000). These values also agree with the above charts within $2.

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 "Revenue Procedure 2021-45" (pdf). IRS. Retrieved 11 November 2021.

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 The MMM Case Study Spreadsheet, The Mr. Money Mustache Community, viewed Jan. 25, 2019.
  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