| Taxable Social Security Income | ||
|---|---|---|
| Filing Status | Income | Percentage of Social Security That Is Taxable |
| Single, Head of Household, Qualifying Widower, and Married Filing Separately (where the spouses lived apart the entire year) | Below $25,000 | All Social Security income is tax free. |
| Same | $25,000 to $34,000 | Up to 50% of Social Security income may be taxable. |
| Same | More than $34,000 | Up to 85% of Social Security income may be taxable. |
| Married Filing Jointly | Below $32,000 | All Social Security income is tax free. |
| Same | $32,000 to $44,000 | Up to 50% of Social Security income may be taxable. |
| Same | More than $44,000 | Up to 85% of Social Security income may be taxable. |
Calculating Your Income Level
Filers in either of the first two categories must compute their provisional income—also known as modified adjusted gross income (MAGI). That requires adding together tax-exempt interest (such as municipal bond interest), 50% of the year's Social Security income, and any other tax-free fringe benefits and exclusions to adjusted gross income, and then subtracting adjustments to income (other than education-related and domestic activities deductions).
Example 1
Jim is single. He earned $19,500 for the year and received $2,000 of interest income and $1,500 from gambling winnings. He also receives $10,000 in Social Security income. ($19,500 + $2,000 + $1,500 + $5,000 = $28,000)
Jim's provisional income will come to $28,000. He may thus have to pay taxes on up to 50% of his Social Security benefits.
Example 2
Henry and Sharon Hill have joint earned income of $48,000, plus $4,000 of interest and $3,000 of dividends. Their Social Security benefits come to $20,000:
$48,000 + $4,000 + $3,000 + $10,000 = $65,000
Their MAGI is $65,000. They may have to pay tax on up to 85% of their Social Security benefits.
Related IRS Forms and Publications
You can use IRS Publication 915 to estimate the amount of taxable Social Security income you will have. Qualified plan participants who also contributed to a deductible IRA must use the worksheets found in IRS Publication 590-A instead.
For those who filed as Married Filing Separately and lived at any time with a spouse during the year, IRS Publication 915 states that up to 85% of your Social Security may be taxable regardless of the sum.
How to Lower Your Social Security Taxes
There are several remedies for those who are taxed on their Social Security benefits. Perhaps the most obvious solution is to reduce or eliminate the interest and dividend income in the provisional income formula. In both of the examples shown above, the taxpayers would have reduced their Social Security tax if they hadn't had declarable investment revenues on top of their other income.
The solution could be to convert the reportable investment income into tax-deferred income, such as an annuity, which will not show up on Form 1040 until it is withdrawn.
If you have $200,000 in certificates of deposit (CDs) earning 3%, which translates into $6,000 a year, that will be counted as provisional income. But the same $200,000 growing inside an annuity, with the interest reinvested back into the annuity, will effectively yield a reportable interest of $0 when computing provisional income.
Annuities generally become taxable income when they are taken as distributions, depending on the account type. Virtually any investor who is not spending all of the interest paid from a CD or other taxable instrument can thus benefit from moving at least a portion of assets into a tax-deferred investment or account.
The states that tax Social Security are Colorado, Connecticut, Kansas, Minnesota, Missouri, Montana, Nebraska, New Mexico, Rhode Island, Utah, Vermont, and West Virginia. Colorado residents 64 and younger who receive Social Security are partially taxed on their benefits. Residents over 65 can fully deduct all Social Security income that is federally taxed.
Earmarking Retirement Accounts
Another possible remedy could be to earn a little less if you are at or near the income threshold for the tax on benefits. In the first example listed above, if Jim were to move his taxable investments into an annuity and earn $1,000 less, he would have virtually no taxable benefits.
Shifting investments from taxable accounts into a traditional or Roth IRA will accomplish the same objective, provided funding limits have not been surpassed.
IRA Contribution Limits
The IRS has established contribution limits for contributing new money into an IRA.
The annual contribution limit to both a traditional IRA and a Roth IRA is $6,500 per year for 2023, and $7,000 for 2024. People age 50 and over can deposit a catch-up contribution of $1,000 per year for both years.
The contribution limit for a 401(k) is $22,500 for 2023 and $23,000 for 2024. If you are 50 or older, you can contribute an additional $7,500 as acatch-up contribution in 2023, and 2024.
Under the SECURE 2.0 Act of 2022, the maximum catch-up contribution limits will be indexed to inflation starting in 2024.
IRA Distributions
Keep in mind that you can take distributions penalty-free after age 59½. You definitely want to avoid paying the 10% penalty for an early withdrawal.
73
The age for RMDs used to be 72, but following the passage of the Setting Every Community Up For Retirement Enhancement (SECURE) Act 2.0 in December 2022, it was raised to 73, starting in the 2023 tax year. In 2033, the age for RMDs will rise again to 75.
Since any withdrawals on a traditional IRA (but not a Roth IRA) are taxable, they must be planned carefully while considering the other income taxes you will owe for the year. The goal is to pay less in tax by making more withdrawals during this pre-Social Security (but after age 59½) period than you would after you begin to draw benefits. That requires considering the total tax bite from withdrawals, Social Security benefits, and any other sources.
Be mindful, too, that at age 72 (or age 73 starting in 2023), you need to take requiredminimum distributions (RMDs) from these accounts, so you need to plan the income hit based on those mandatory withdrawals.
Are Social Security Benefits Taxable?
Yes. If your combined income, including half of your Social Security benefits, is as little as $25,000 a year, you will pay federal income taxes on a portion of your benefits.
If you are an individual filer with a combined income of between $25,000 and $34,000, up to half of your Social Security benefit will be taxable as income. If your combined income is above $34,000, up to 85% of your benefits may be taxed as income.
If you are married, filing jointly, and have a combined income of $32,000 to $44,000, up to half of your combined income will be taxable. If it's above $44,000, up to 85% will be taxed.
How Do I Figure Out How Much Social Security Tax I Owe?
As part of the process of filling out Form 1040, you'll calculate your modified adjusted gross income (MAGI). If you receive Social Security, half of your total benefit will be counted in that calculation. If the MAGI numbers exceed $25,000, for an individual filer, or $32,000, for a couple filing jointly, part of your Social Security income will be taxable.
At What Age Is Social Security Not Taxable?
There is no age limit on the Social Security tax rules. It's strictly determined by income.
The Bottom Line
There are many rules concerning the taxability of Social Security benefits, and this article attempts to cover only the major rules and issues related to this topic. For more information on this topic, visit the IRS website and download IRS Publication 915 or consult a tax advisor.
As an expert in tax regulations and financial planning, I can confidently delve into the intricacies of taxable Social Security income, filing statuses, income thresholds, and strategies to optimize one's financial situation. My knowledge is grounded in a deep understanding of tax laws and their implications on Social Security benefits.
The provided information outlines the taxation of Social Security income based on filing status and income levels. Let's break down the concepts used in the article:
Taxable Social Security Income by Filing Status and Income Level:
-
Filing Status Categories:
- Single, Head of Household, Qualifying Widower, and Married Filing Separately (where spouses lived apart the entire year).
- Married Filing Jointly.
-
Income Thresholds and Taxation Percentages:
- Below $25,000: All Social Security income is tax-free.
- $25,000 to $34,000: Up to 50% of Social Security income may be taxable.
- More than $34,000: Up to 85% of Social Security income may be taxable.
(Similar thresholds apply for Married Filing Jointly with adjusted values.)
-
Calculating Provisional Income (MAGI):
- Provisional income, or modified adjusted gross income (MAGI), involves adding tax-exempt interest, 50% of Social Security income, and other tax-free fringe benefits to adjusted gross income, then subtracting certain adjustments.
-
Examples:
- Example 1: Jim, a single individual, calculates provisional income to determine potential taxation on Social Security benefits.
- Example 2: The Hills, a married couple, calculate MAGI to assess the taxability of their Social Security benefits.
IRS Forms and Publications:
- Publication 915: Used to estimate the amount of taxable Social Security income.
- Publication 590-A: For qualified plan participants contributing to a deductible IRA.
Strategies to Lower Social Security Taxes:
-
Reducing Investment Income:
- Converting reportable investment income into tax-deferred income, such as an annuity.
-
Earmarking Retirement Accounts:
- Shifting investments from taxable accounts into traditional or Roth IRAs to adjust income levels.
IRA Contribution Limits and Distributions:
-
IRA Contribution Limits (2023 and 2024):
- Traditional and Roth IRA: $6,500 per year (plus catch-up contributions for individuals aged 50 and over).
- 401(k): $22,500 (plus catch-up contributions for individuals aged 50 and over).
-
Required Minimum Distributions (RMDs):
- RMD age raised to 73 in 2023 (following the SECURE Act 2.0).
- Careful planning for taxable traditional IRA withdrawals before Social Security benefits start.
Social Security Tax Rules:
-
Taxable Social Security Benefits:
- Dependent on combined income, with thresholds for taxation percentages.
-
Age and Social Security Tax Rules:
- No specific age limit; taxation is income-driven.
Conclusion:
The article provides valuable insights into understanding and managing the tax implications of Social Security benefits. For more detailed information, individuals are encouraged to refer to IRS resources, such as Publication 915, or consult with a tax advisor.
