How Your Social Security Benefits Are Taxed

Tax Tips

How Your Social Security Benefits Are Taxed

Uncle Sam may take a bite on up to 85% of your benefits.


Social Security benefits aren't exempt from taxes. If you have income from a job (even if you aren't hit by the earnings test), investments or other sources, such as withdrawals from retirement savings plans, you could owe federal income taxes on up to 85% of your benefits.

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Social Security taxes are based on what's known as your provisional income -- your adjusted gross income (including pension payouts and retirement-account withdrawals but not counting Social Security benefits), plus any tax-free interest, plus 50% of your benefits. If the total is less than $25,000 if you're single or $32,000 if you're married, all of your benefits are tax-free. Provisional income of between $25,000 and $34,000 for singles and $32,000 and $44,000 for married couples will trigger taxes on up to 50% of your benefits. Provisional income of more than $34,000 for singles and $44,000 for married couples will subject up to 85% of your benefits to taxes.

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Depending on where you live, state taxes could also eat into your benefits. Some 36 states exclude benefits from taxes (or have no income tax), but five -- Minnesota, North Dakota, Rhode Island, Vermont and West Virginia -- tax up to 85% of Social Security benefits. Colorado, Connecticut, Kansas, Missouri, Montana, Nebraska, New Mexico and Utah also tax a portion of Social Security benefits but provide exemptions based on income or age.

There are steps you can take to reduce or eliminate taxes on your benefits. One is to convert some or all of your traditional IRA to a Roth. While withdrawals from a traditional IRA or 401(k) are counted in your provisional income, withdrawals from a Roth IRA aren't included in the calculation. Converting a traditional IRA to a Roth could trigger higher taxes on your benefits in the year of the conversion, because the amount converted is included in your income. Once you've converted, though, you can withdraw as much as you want from your Roth without increasing your provisional income.

See Also: 13 States That Tax Social Security Benefits