Is Social Security Taxable?

What is Social Security and Why is It Important?

Social Security is a government program designed to provide financial support to retirees, disabled individuals, and dependents of deceased workers. Throughout your working years, you contribute to Social Security through payroll taxes. Once you reach retirement age, you can begin receiving benefits, which acts as a steady source of income to help cover essential expenses like housing, healthcare, and even daily living costs.

For many retirees, Social Security is a crucial part of their financial plan. While it’s not meant to be the sole source of income in retirement, it provides a safety net in addition to savings from retirement accounts (like 401(k)s and IRAs). 

So, is Social Security taxable? The short answer: it depends. While some people won’t owe a dime in taxes on their benefits, others might have to pay taxes on up to 85% of what they receive. Let’s break it down in a simple way, so you can plan accordingly.

When is Social Security Taxed?

Whether or not you’ll owe taxes on your Social Security benefits depends on your income level. To determine your income level, the IRS looks at your combined income, which includes:

• Your Adjusted Gross Income (AGI): This is your total income for the year before deductions.

• Non-taxable Interest: This is interest from things like municipal bonds, which the IRS doesn’t tax but is still included when figuring out if you’ll owe taxes on your Social Security benefits.

• Half of Your Social Security Benefits: The IRS only includes 50% of your Social Security income when calculating whether you’ll owe taxes on it.

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What Types of Income Can Make Social Security Taxable?

Since your combined income includes more than just Social Security, other sources of income can push you over the tax thresholds. Here are some common examples:

• 401(k) and Traditional IRA Withdrawals: If you take money from a Traditional IRA or a 401(k), it’s considered taxable income and counts toward your combined income.‍
• Part-Time Work: Many retirees continue to work in some capacity, and those earnings count toward your combined income.‍
• Investment Income: Money earned from investments (like dividends, interest, and profits from selling assets) counts toward your total income.
• ‍Pensions: If you have a pension, those payments will be included in your taxable income.

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Tax Rules to Be Aware Of

So now that you know what goes into determining your income level, here’s a breakdown of the tax rules for different filing statuses and incomes:

For Single Filers, if your combined income is

• Less than $25,000: No taxes on benefits
• $25,000 to $34,000: Up to 50% may be taxable
• Over $34,000: Up to 85% may be taxable

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For Married Couples Filing Jointly, if your combined income is

• Less than $32,000: No taxes on benefits
• $32,000 to $44,000: Up to 50% may be taxable
• Over $44,000: Up to 85% may be taxable

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Learn more about IRS guidelines on Social Security taxation.

How to Reduce (or Avoid) Social Security Taxes

If you’re concerned about Social Security taxes, there are some strategies to help minimize them.

1. Withdraw from Roth Accounts

Qualified Roth IRA withdrawals aren’t counted as taxable income. This can help keep your combined income lower and reduce or eliminate Social Security taxes.

2. Manage Retirement Account Withdrawals

Avoiding withdrawals from Traditional IRAs and 401(k)s can help lower your taxable income. If you do withdraw, consider doing so strategically to stay in a lower tax bracket.

3. Delay Social Security

Waiting until the age of 70 to claim Social Security increases your benefits and allows more time to manage withdrawals from taxable accounts, potentially lowering the taxable portion of your Social Security benefits.

4. Use Qualified Charitable Distributions (QCDs)

If you’re 70½ or older, donating up to $100,000 a year from your IRA to charity can lower your overall income since those donations aren’t taxed. This could help keep you under the income limits for Social Security taxes, which means you might pay less in taxes on your benefits.

Including Social Security in Your Retirement Plan

Retirement planning is all about building a steady income to help you enjoy life after you stop working, and Social Security is just one piece of the puzzle. While it serves as a foundation, most retirees also depend on personal savings, retirement accounts, and investment income to achieve financial security. Understanding how Social Security fits into your overall plan, including how it’s taxed, allows you to make informed decisions about when to claim benefits and how to structure your income sources. A good strategy should cover all the bases of retirement, including taxes, withdrawals, and your needs as you move forward. 

Simplify Your Savings With a PensionBee IRA

IRAs can provide substantial tax benefits that can help you improve your savings strategy and reach your retirement goals. When choosing which IRA is right for you, consider factors such as what your income and tax bracket will look like during retirement, which providers can best serve you, and how much complexity you want to bring into your investment strategy. For a simple solution, consider working with PensionBee to rollover all of your old 401(k) accounts into an easy-to-manage PensionBee IRA that allows you to keep better track of your retirement savings without sacrificing tax benefits.