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 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.
(Note that Supplemental Security Income (SSI) payments sent by the Social Security Administration are not taxable.)
How Federal Taxes on Social Security Are Calculated
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 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.
Taxation of Lump-Sum Social Security Payments
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 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.
State Taxation of Social Security Benefits
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 where you live for information about the your state's estimated tax payment rules.