Will I Owe Income Tax on My Social Security Retirement Benefits?

One of the most common questions we receive is whether Social Security benefits are taxable. This article will help you determine if you will owe taxes on your benefits and then provide you with planning strategies to minimize any taxes due.

How do I determine if federal income tax is due on my Social Security benefits?

The IRS provides a worksheet to determine if benefits are taxable. As with any IRS form, the process can be tedious, so below is a simplified process to determine the taxes due.

🎥 Want a walkthrough instead? Watch our video, Are My Social Security Benefits Taxable?!, which explains provisional income, shares real-life case studies, and provides strategies to reduce or avoid taxes on your benefits.

1. Determine the amount of Social Security benefits paid for the previous year.
   This information can be found in box 5 on Form SSA-1099 provided by the Social Security Administration.

2. Calculate adjusted gross income for the previous year by combining all the following:

   • Wages

   • Salaries

   • Tips

   • Interest earned, including municipal bond interest

   • Ordinary dividends

   • Capital gains

   • IRA distributions

   • Pension income

   • Annuity income

   • Other income listed on IRS Form 1040 Schedule 1, Line 9, such as alimony received, business income, rental real estate income, and unemployment compensation

3. Calculate provisional income.

4. Compare provisional income to the IRS chart to determine how much of your Social Security benefit is taxable.

Examples

Example 1
Tom and Emily are married and collect $30,000 per year in Social Security retirement benefits. They file jointly. In addition, they have $50,000 of taxable income, including IRA withdrawals and Tom’s pension. Based on the provisional income equation in step 3, their provisional income is $65,000 for the year. When compared to the table in Step 4, they are over the $44,000 limit. Therefore, up to 85% of their Social Security income will be treated as taxable income.

If we take their $30,000 in Social Security benefits and multiply it by 0.85, we are left with $25,500. This is the amount added as taxable income on their federal tax return. At a 12% bracket, they will owe $3,060 in taxes on their benefits.

Example 2
Roger and Jane are married and collect $30,000 per year in Social Security retirement benefits. They file jointly. In addition, they have $16,000 of taxable income, including IRA withdrawals and CD interest. Their provisional income is $31,000 for the year. Compared to the IRS chart, they are under the $32,000 limit. Therefore, none of their Social Security income will be taxable, and no federal tax will be owed.

How do I determine if I will owe state income tax on my Social Security benefits?

Many states do not impose income tax on Social Security benefits. However, there are currently 13 states that do. Each state taxes Social Security differently, so it is best to check with a tax preparer. The following states may tax Social Security:

Colorado, Connecticut, Kansas, Minnesota, Missouri, Montana, Nebraska, New Mexico, North Dakota, Rhode Island, Utah, Vermont, West Virginia

What planning opportunities are available if our provisional income exceeds the limits?

When trying to minimize federal taxes owed on Social Security benefits, the focus is on reducing taxable income for the year. Some sources of taxable income, such as pensions, annuities, or required minimum distributions, cannot be eliminated. However, other strategies may help:

• Use savings, money markets, or CDs for living expenses instead of making taxable IRA withdrawals or triggering capital gains. This reduces provisional income.

• Withdraw money from a Roth IRA instead of a traditional IRA to reduce taxable income.

Here’s an example:
Couple 1 withdraws $25,000 from a traditional IRA. Couple 2 withdraws $25,000 from a Roth IRA. Without making any other income changes, Couple 2 avoids paying federal taxes on their Social Security benefits.

Notice that couple 1 is withdrawing $25,000 from a traditional IRA, whereas couple 2 is withdrawing $25,000 from a Roth IRA. Without making any other changes to income, couple 2 can avoid paying federal taxes on their social security benefits.

Where can I get more information on Social Security benefits?
What to Look For on Your Social Security Benefit Statement and Social Security Spousal and Restricted Spousal Benefits are articles from previous months and excellent resources. Additionally, the Social Security Administration has valuable information on its website.