How much (if any) of your Social Security benefits are taxable depends on several key factors. The following information will help you understand the taxability of your Social Security benefits.
Taxable Social Security Benefits
For this discussion, the term “Social Security benefits” refers to the gross amount of benefits you receive (i.e., the amount before any reductions due to payments withheld for Medicare premiums). For tax purposes, Social Security benefits are treated the same regardless of whether the benefits are paid due to disability, retirement, or reaching the eligibility age. Supplemental Security Income benefits are not included in these computations because they are not taxable under any circumstance.
The taxability of your Social Security benefits depends on your total income and marital status:
- 📌 If Social Security is your only source of income, it is generally not taxable.
- 📌 On the other hand, if you have other significant income, up to 85% of your Social Security benefits may be taxable.
- 📌 If you are married and filing separately, and you lived with your spouse at any time during the year, 85% of your Social Security benefits are taxable—regardless of your income. This rule prevents married taxpayers who live together from filing separately to reduce the income on each return and thus reduce the amount of Social Security income that is subject to tax.
💡 The Formula
The following quick computation can determine if some of your benefits are taxable: Add half of your total Social Security benefits to your total other income, including any tax-exempt interest and certain other exclusions from income. Then, compare this total to the base amount used for your filing status. If the total exceeds the base amount, some of your benefits may be taxable.
💵 Income Exclusions
These exclusions include interest from qualified U.S. savings bonds (used for education expenses), employer-provided adoption benefits, foreign-earned income or foreign housing income, and income earned by bona fide residents of American Samoa or Puerto Rico.
When taxpayers can defer their non-Social Security income from one year to another, such as by delaying individual retirement account (IRA) distributions, they may be able to plan their income to eliminate or minimize the tax on their Social Security benefits in a given year. However, the required minimum distribution (RMD) rules for IRAs and other retirement plans must be taken into account.
Individuals with substantial IRAs who either aren’t required to make withdrawals or are making post-age 70.5 RMDs but are not withdrawing enough to reach the Social Security tax threshold may be missing an opportunity for tax-free withdrawals. Everyone’s circumstances are different, and what works for one person may not work for another.
Need Help?
Want to ensure you’re not overpaying on your Social Security benefits in 2024? Reach out today for a personalized tax strategy session tailored to your unique situation. Let’s make sure you’re getting the most out of your hard-earned benefits.