In 1983 changes were made to strengthen the solvency of Social Security. Two notable changes were the gradual raising of the full retirement age for Social Security retirement benefits and the potential for a person’s Social Security to be taxed. This article delves into taxation of Social Security retirement benefits.
A person with Social Security as their sole source of income does not pay any federal income tax.
If a person receives Social Security retirement benefits and additional income that meets certain thresholds a percentage of their benefits could be taxed. Whether they are taxable and to what extent depends on “combined income” and filing status.
Combined Income = *Adjusted Gross Income (AGI) + Nontaxable Interest + ½ of Social Security Benefits
*AGI in this part of the equation does not include Social Security income. One-half of Social Security is factored in at the end of the equation.
The percentage of the benefit taxed ranges from up to 50% and up to 85%. Two ranges of base amounts have been established and are not indexed for inflation.
Range 1 Base Amounts: Up to 50% of Benefits Taxable
- Individual filers with combined income between $25,000 – $34,000.
- Married filing jointly with combined income between $32,000 and $44,000.
Range 2 Base Amounts: Up to 85% of Benefits Taxable
- Individual filers with combined income > $34,000
- Married filing jointly with combined income > $44,000
According to the Social Security Administration, a person who files a tax return as married filing separately and lived with their spouse any time during that tax year will likely pay taxes on their Social Security benefits.
Note: “Up to” is the highest percentage that could be taxed in each range. The actual amount subject to taxation can be much less for people with modest incomes.
The taxable amount of Social Security is shown on a person’s tax return. For 2023 returns the total amount of Social Security received is listed on Form 1040-line 6a and line 6b shows the taxable amount.
The following can also be used to calculate the taxable amount of Social Security retirement benefit:
- IRS interactive assistant https://www.irs.gov/help/ita/are-my-social-security-or-railroad-retirement-tier-i-benefits-taxable
- Worksheet 1 in IRS Publication 915 https://www.irs.gov/pub/irs-pdf/p915.pdf (Since the base amounts are not indexed for inflation Worksheet 1 is somewhat evergreen.)
Note: If you contributed to a traditional Individual Retirement Account (IRA) and you or your spouse are covered by a workplace retirement plan, you must use the special worksheets in Appendix B of Pub. 590-A https://www.irs.gov/forms-pubs/about-publication-590-a
Two very simple examples of Social Security and federal income taxes are discussed below.
Example 1: Jane, age 66, is a single retired tax filer. In 2023, she has a Social Security retirement benefit of $23,000 and taxable pension income of $20,000. She has no other income. Jane uses the IRS Interactive Assistant (https://www.irs.gov/help/ita/are-my-social-security-or-railroad-retirement-tier-i-benefits-taxable ) and finds that $3,250 of her Social Security benefit is considered taxable income.
Jane’s total income for tax purposes = $3,250 + $20,000 = $23,250. She files her 2023 tax return and takes the standard deduction of $15,700 for a single filer over age 65.
Jane’s 2023 taxable income = $23,250 – $15,700 = $7,550. Her federal tax liability for 2023 = $758
Example 2: Jack and Jill are both retired, age 67, and married filing a joint tax return. In 2023 their total Social Security retirement income is $45,000 and they have other taxable income of $22,000. They do not have any other income. Jack and Jill use the IRS Interactive Assistant and find that $6,425 of their benefit is considered taxable income.
Jack and Jill’s total income for tax purposes = $6,425 + $22,000 = $28,425.
They file a joint 2023 tax return and take the standard deduction of $30,700 for married filing jointly and both over age 65.
Jack and Jill’s 2023 taxable income = $28,425 – $30,700 = less than zero, so they do not have any taxable income. Jack and Jill have $0 in federal income tax liability.
Sources:
IRS. Publication 915, “Social Security and Equivalent Railroad Retirement Benefits.” https://www.irs.gov/pub/irs-pdf/p915.pdf retrieved 8/14/2024.
Social Security Administration. “Income Taxes and Your Social Security Benefit,” https://www-origin.ssa.gov/benefits/retirement/planner/taxes.html retrieved 8/14/2024.
Social Security Administration. “Social Security History,” https://www.ssa.gov/history/InternetMyths2.html retrieved 8/14/2024.
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