How to Avoid the Social Security Tax Trap

If you receive Social Security benefits, you may be wondering how much of it is taxable. Depending on the amount of your Social Security benefits and other income, up to 85% of your benefits are taxable. It all depends on the steps you take to reduce your tax exposure. Keep reading to find out how you can cut back on the tax liability on your Social Security Income.

Key Takeaways

• Up to 85% of your Social Security benefits may be taxable.
• Your benefits are not taxed if your combined income falls below $32,000 (married filing jointly) or $25,000 (single, heads of household, surviving spouse, or married filing separately where spouses lived apart for the entire year).
• If you file as an individual, you may have to pay income tax on up to 50% of your benefits if your income is between $25,000 and $34,000. For income greater than $34,000, up to 85% of your benefits may be taxable.
• If you file jointly, you may have to pay income tax on up to 50% of your benefits if your combined income is between $32,000 and $44,000. For income greater than $44,000, up to 85% of your benefits may be taxable.
• Check with your state’s tax department to see if you have to pay state taxes on your Social Security benefits.

Calculating Social Security Income Taxes

To know whether your Social Security benefits are partially taxed or fully tax-free, you need to follow formulas unique to this determination. Add together your:

• Gross income with certain adjustments. This is the amount from line 21 of Form 1040. Be sure to add any income excluded from interest on U.S. savings bonds that was used for higher education in addition to employer-provided adoption benefits, foreign earned income or foreign housing, and income earned by residents of American Samoa or Puerto Rico.
• One-half of your Social Security benefits. This is the amount listed on Form SSA-1099, Social Security Benefit Statement, which is sent to you by the Social Security Administration by the end of January following the year in which benefits were paid. For income tax purposes, the benefits are the gross amount listed in box 3, not the net amount you actually received after premiums for Medicare were withheld.
• All tax–exempt interest. This is interest from municipal bonds listed on line 8a of Form 1040.

Your Base Amount

Compare the results to a base amount fixed for your filing status:

• $32,000 if married filing jointly
• $25,000 if single, head of household, qualifying widow(er), or married filing separately where spouses lived apart for the entire year

Your Tax Liability

You must determine whether 50% or 85% of benefits are includable if the income mix you figured out earlier is equal to or above your base amount. Here’s how it works:

• For married persons filing jointly, 50% is includable for income between $32,000 and $44,000; 85% is includable if income is more than $44,000.
• For those who are single, head of household, a qualifying widow(er) filing separately where spouses lived apart for the entire year, 50% is includable if income is between $25,000 and $34,000; 85% of benefits are includable if income is above $34,000.

For a married person filing separately who did not live apart from their spouse for the full year, 85% of benefits are includable.

Important

None of your benefits are taxed if you fall below this base amount.

Special Considerations 

Don’t use the usual computation if any of the following applies to your situation:

• You made deductible individual retirement account (IRA) contributions and you (or your spouse) were covered by a qualified retirement plan through your job or self-employment. In this case, use the worksheet in IRS Publication 590-A.
• You repaid any Social Security benefits during the year, which is explained in IRS Publication 915.
• You received benefits this year for an earlier year. You can make a lump-sum election that will reduce the taxable amount for this year. Use worksheets in IRS Publication 915.

Strategy: Bunch Your Income

You may want to push or defer income to another year since 85% of benefits are includable once you pass the $44,000/$34,000 income threshold.

For instance, if you know your income will be above this threshold and you’re planning on converting a traditional IRA to a Roth IRA, make the conversion this year and pay the taxes on it. Doing so won’t result in any additional inclusion of Social Security benefits.

You won’t have to take required minimum distributions (RMDs)​ in the future because you have a Roth IRA, not a traditional one. This will keep your income lower in future years than it would have been without the conversion.

State Income Tax Rules

Federal income tax isn’t the only tax you need to consider. You also have to account for state taxes when it comes to your Social Security.

As of 2024, 9 states tax Social Security benefits. Four of these states—Connecticut, New Mexico, Rhode Island, and Utah—have high-income thresholds for taxing benefits, so even if you are a resident, your benefits may not actually be taxed. Depending on your state, you may be able to lower your tax liability based on your income level or deductions.

What Is Social Security?

Social Security is a national insurance benefit program. It was established in 1935 by then-President Franklin D. Roosevelt. People pay into the program through payroll deductions. The program is operated by the Social Security Administration.

How Do Social Security Retirement Benefits Work?

You pay into the Social Security program through payroll deductions. (Self-employed people pay in, too, with the self-employment tax.)

The amount of benefits you receive depends on the highest 35 years of earnings and when you chooses to take their benefits. If you pay into the program for at least 10 years, you can claim benefits when you turn 62. If you wait until your full retirement age (which is either 66 or 67, depending on your birth date), you’ll receive your full benefits. If you delay claiming benefits beyond your full retirement age, your benefits will increase up to age 70.

How Do Social Security Disability Benefits Work?

This part of the program pays individuals who aren’t able to work because of a disability. The Social Security Administration determines eligibility. People who claim disability benefits are required to meet earnings tests.

Who Can Collect Survivor Benefits Through Social Security?

Survivor benefits are paid to spouses, children, and other dependents of Social Security recipients after they die. Survivors are required to apply for benefits in certain circumstances, including if they receive benefits themselves or if benefits aren’t automatically paid out.

The Bottom Line

If you’re looking forward to retirement, there are a lot of things you’ll need to consider, including how you’ll earn income. If you’ve paid into the program for at least 10 years, you may qualify for Social Security benefits. But remember—you may have to pay taxes on these benefits, depending on your income and filing status. If you have any questions about whether your Social Security benefits are taxable, talk to a certified public accountant (CPA) or tax advisor who can run the numbers for you.