How much are social security benefits taxed

On Thursday, the Social Security Administration (SSA) announced the cost-of-living adjustment (COLA) for Social Security payments based on inflation over the previous year. This has brought renewed attention to how the tax code treats Social Security benefits, which can be a confusing subject for taxpayers.

Each year, SSA adjusts Social Security benefits for inflation, much like how certain aspects of the tax code are indexed for inflation. In 2022, for example, Social Security recipients received a 5.9 percent adjustment. For 2023, the cost-of-living adjustment is expected to rise to about 8.7 percent, driven by unusually high inflation that reduces the nominal value of existing Social Security benefits. 

The tax treatment of Social Security benefits is complicated and can trip up taxpayers and tax experts alike. That’s because the tax code treats Social Security benefits differently from other types of income. First, taxpayers calculate their “combined income,” defined as their adjusted gross income (AGI), tax-exempt interest income, and half of their Social Security benefits.

Taxpayers who earn less than $25,000 (single filers) or $32,000 (joint filers) in combined income pay no tax on their benefits. Households earning between those thresholds and up to $34,000 (single filers) or $44,000 (joint filers) pay tax on up to 50 percent of their benefits. Above those levels, up to 85 percent of benefits are taxed.

The combined income thresholds were originally established in 1984 and updated in 1993, but have not been indexed for inflation. This means that a larger portion of Social Security benefits will be taxed over time due to bracket creep, especially true in a time of high inflation.

Some policymakers have proposed exempting Social Security payments from income tax altogether, arguing that this could help provide relief from high inflation. While there is a strong case for indexing the combined income thresholds for inflation much like we have indexed ordinary income tax brackets, it would be a step too far to entirely exempt Social Security income from tax. However, there are ways to improve the tax treatment of benefits.

Under the current tax code, employees cannot deduct their portion of payroll taxes paid from their income tax liability, but employers can deduct their portion of the payroll tax as an ordinary business expense (with exceptions for non-profits or firms incurring losses). One way to think about this is that half of the contribution from the payroll tax is treated like a traditional retirement account, where there is a deduction for saving up front, and half is treated like a Roth account, where tax is paid up front.

This means that a portion of the Social Security benefits should be taxed when received, though there are disagreements about the precise amount that should be subject to tax. The tax treatment of Social Security benefits is also complicated by the fact that beneficiary contributions are not tightly linked to benefits as they are with defined contribution plans such as traditional or Roth 401K accounts.

No matter how we think about them conceptually, Social Security benefits should still be considered income, and it would be proper to include them in the income tax base. Broad exemptions from the income tax would not provide longer-term relief from inflation for beneficiaries and would continue the long-running trend of narrowing the income tax base at the cost of higher tax rates.

However, there are options to simplify and improve the tax treatment of benefits. These include indexing the combined income thresholds for inflation and moving away from a confusing mix of traditional and Roth-style treatment.

Instead, the tax code could treat benefits as a traditional or Roth form of saving by either fully taxing or exempting benefits as they are received and modifying how payroll tax deductions are treated in kind. While this may not solve every challenge associated with taxing defined benefits, it would be a simpler process for taxpayers.

Many people are surprised to learn that Social Security benefits can be taxed. After all, why is the government sending you a payment one day and asking for some of it back the next? But if you take a closer look at how the federal tax on Social Security is calculated, you'll see that many people actually don't pay any tax on their Social Security benefits.

There's no federal income tax on Social Security benefits for most people who only have income from Social Security. Thanks to the highest cost-of-living adjustment in 40 years, the average monthly Social Security check for a retired worker in 2022 is $1,658, which comes to $19,896 per year. That's well below the minimum amount for taxability at the federal level.

On the other hand, if you do have other taxable income — such as from a job, a pension or a traditional IRA — then there's a much better chance that Uncle Sam will take a 50% or 85% bite out of your Social Security check. Plus, depending on where you live, your state might tax a portion of your Social Security benefits, too.

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(Note that Supplemental Security Income (SSI) payments sent by the Social Security Administration are not taxable.)

Once you start collecting Social Security benefits, you'll get a Social Security benefits statement (Form SSA-1099) in the mail each year in January showing the total amount of benefits you received in the previous year. To figure out how much, if any, of the total amount may be taxed, the first thing you need to do is calculate your "provisional income." Your provisional income is generally equal to the combined total of (1) 50% of your Social Security benefits, (2) your tax-exempt interest, and (3) the other non-Social Security items that make up your adjusted gross income (minus certain deductions and exclusions).

For single people, your Social Security benefits aren't taxed if your provisional income is less than $25,000. The threshold is $32,000 if you're married and filing a joint return. If your provisional income is between $25,000 and $34,000 for a single filer, or from $32,000 to $44,000 for a joint filer, then up to 50% of your Social Security benefits may be taxable. If your provisional income is more than $34,000 on a single return, or $44,000 on a joint return, up to 85% of your benefits may be taxable.

The IRS has a handy calculator (opens in new tab) that can help you determine whether any of your Social Security benefits are taxable and, if so, how much. Once you know how much (if any) is taxable, that amount is included on Line 6b of Form 1040 and becomes part of your taxable income. That income is then taxed with other income according to your tax bracket.

When calculating taxes on Social Security benefits, include the taxable part of a lump-sum (retroactive) payment of benefits received during the year in your income for the year, even if the payment includes benefits for an earlier year. But, if it lowers your taxable benefits, a special rule may allow you to calculate the taxable part of a lump-sum payment using your income for the earlier year.

Don't confuse lump-sum retirement benefits with lump-sum death benefits, though. No part of a lump-sum death benefit paid by the Social Security Administration is taxable.

Tax Withholding and Estimated Tax Payments for Social Security Benefits

If you know in advance that a portion of your Social Security benefits will be taxed, it's a good idea to have federal income taxes withheld from your payment each month. Simply fill out Form W-4V (opens in new tab) to request withholding at a rate of 7%, 10%, 12% or 22%, and then send the form to your local Social Security office.

If you don't want to have taxes withheld from your monthly payments, you can make quarterly estimated tax payments instead. Either way, you just want to make sure you have enough withheld or paid quarterly to avoid an IRS underpayment penalty when you file your income tax return for the year.

In addition to federal taxes, some states tax Social Security benefits, too. The methods and extent to which states tax benefits vary. For example, New Mexico treats Social Security benefits the same way as the federal government. On the other hand, some states tax Social Security benefits only if income exceeds a specified threshold amount. Missouri, for instance, taxes Social Security benefits only if your income is at least $85,000, or $100,000 if you're married filing a joint return. Utah includes Social Security benefits in taxable income but allows a tax credit for a portion of the benefits subject to tax.

Although you can't have state taxes withheld from your Social Security benefits, you generally can make estimated state tax payments. Check with the state tax agency (opens in new tab) where you live for information about the your state's estimated tax payment rules.

As the "Ask Kim" columnist for Kiplinger's Personal Finance, Lankford receives hundreds of personal finance questions from readers every month. She is the author of Rescue Your Financial Life (McGraw-Hill, 2003), The Insurance Maze: How You Can Save Money on Insurance -- and Still Get the Coverage You Need (Kaplan, 2006), Kiplinger's Ask Kim for Money Smart Solutions (Kaplan, 2007) and The Kiplinger/BBB Personal Finance Guide for Military Families. She is frequently featured as a financial expert on television and radio, including NBC's Today Show, CNN, CNBC and National Public Radio.