Whether Social Security benefits are subject to federal income tax depends on your “combined income,” which includes your adjusted gross income, nontaxable interest, and one-half of your Social Security benefits. According to the Social Security Administration, individuals with a combined income between $25,000 and $34,000 may pay income tax on up to 50% of their benefits, while those exceeding $34,000 may pay tax on up to 85% of their benefits.
Understanding Combined Income Thresholds
The Internal Revenue Service (IRS) calculates the taxability of Social Security benefits based on a specific formula. You must add your adjusted gross income (AGI), any tax-exempt interest, and half of your total Social Security benefits to determine your combined income.
For individual filers:
* $25,000 or less: Your Social Security benefits are generally not taxable.
* $25,000 to $34,000: Up to 50% of your benefits may be taxable.
* Over $34,000: Up to 85% of your benefits may be taxable.
For those filing jointly, the thresholds shift to higher amounts for the 50% bracket and the 85% bracket, according to IRS Publication 915.
Strategies to Manage Tax Liability
If you continue to work at age 73, your earned income increases your AGI, which often pushes your combined income into a higher tax bracket. Because the taxability of Social Security is tied to your total income, reducing your AGI can lower the portion of your benefits subject to federal tax.
Financial planners often point to traditional Individual Retirement Account (IRA) distributions as a primary factor in this calculation. If you are required to take Required Minimum Distributions (RMDs) at age 73, these withdrawals count toward your AGI. Some taxpayers choose to utilize Qualified Charitable Distributions (QCDs) if they are 70½ or older. A QCD allows you to transfer a set annual limit (as of 2024) directly from an IRA to a qualified charity. Because the money goes directly to the charity, it is excluded from your AGI, which can indirectly keep your combined income lower and potentially reduce the tax impact on your Social Security benefits.
Federal vs. State Taxation
While federal rules are uniform, state taxation of Social Security varies significantly. According to the AARP, most states do not tax Social Security benefits. However, a small number of states—including Colorado, Connecticut, Minnesota, Montana, New Mexico, Rhode Island, Vermont, and West Virginia—may tax benefits depending on your income level or age. It is essential to check your specific state’s Department of Revenue guidelines, as these policies are subject to annual legislative changes.
Proactive Tax Withholding
If you anticipate owing taxes on your Social Security benefits, you do not have to wait until tax season to settle the bill. You can request that the Social Security Administration withhold federal taxes from your monthly benefit payments. By filing Form W-4V (Voluntary Withholding Request), you can choose to have a percentage of your monthly benefit withheld for taxes. This helps avoid an unexpected “surprise” bill when filing your annual return.