Calculating Taxes on Social Security Benefits
Uncle Sam can tax up to 85% of your Social Security benefits if you have other sources of income, such as earnings from work or withdrawals from tax-deferred retirement accounts.
Many people are surprised to learn that Social Security benefits are taxable. But if you look at how the federal tax on Social Security is calculated, you'll notice that benefits aren't taxed for most people who only have income from Social Security. For 2020, the estimated average monthly Social Security check is $1,503, which comes to $18,036 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.
How Federal Taxes on Social Security Are Calculated
If you're trying figure out if your Social Security benefits will be taxed, the first thing you need to do is calculate what the IRS calls your "base income" (often referred to as your "provisional income"). Your base income is equal to the combined total of (1) 50% of your Social Security benefits, (2) your tax-exempt interest, and (3) your adjusted gross income (not including the student loan interest deduction or the tuition and fees deduction).
For single people, your Social Security benefits aren't taxed if your base income is less than $25,000. The threshold is $32,000 if you're married and filing a joint return. If your base 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 base 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 that can help you determine whether your benefits are taxable.
State Taxation of Social Security Benefits
In addition to federal taxes, there are also 13 states that tax Social Security benefits. The methods and extent to which these states tax benefits vary. For example, Utah 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. Nebraska, for instance, taxes Social Security benefits only if your income is at least $43,000, or $58,000 if you're married filing a joint return.
For information about state Social Security taxes, see 13 States That Tax Social Security Benefits. If you don't live in a state that taxes Social Security benefits, check out 38 States That Don't Tax Social Security Benefits for information on income, sales, property and estate taxes that retirees might face. Also see Kiplinger's State-by-State Guide for Taxes on Retirees for the full tax picture in each state, and our lists of the 10 most tax-friendly states for retirees and the 10 least tax-friendly states for retirees.