Most people are used to having a percentage of their paycheck withheld for Social Security. The withholding rate in 2022 stands at 6.2% for individuals and another 6.2% for their employers, for a total of 12.4% per person.1
But when it comes time to collect your own Social Security, are you still obligated to pay income tax on the benefits? It’s easy to assume the answer is a resounding “no,” but that’s not always the case. In fact, about 56% of people who receive Social Security owe income tax on their benefits. Let’s take a look at when your Social Security benefits may be subject to income tax, and what you can do to manage your tax obligation.2
Remember, this article is for informational purposes only and is not a replacement for real-life advice on Social Security benefits or retirement income. So make sure to consult your financial or tax professional before modifying your strategy based on anticipated taxes or other considerations.
What Type of Social Security Is Subject to Income Tax?
The only type of Social Security that is not taxable is Supplemental Security Income (SSI).
That means that any of these benefits could be subject to income taxes:
- Retirement benefits
- Spousal benefits
- Survivor benefits
- Social Security Disability Insurance (SSDI)
However, if your child receives Social Security benefits—such as dependent or survivor benefits—and does not have to file their own tax return, those payments are exempt from being included as part of your taxable income. If your child does earn enough income to file their own return, then normal tax rules apply.
When Are Your Benefits Taxable?
The Internal Revenue Service (IRS) has defined a set of rules to determine if your Social Security benefits are subject to federal income taxes.3
For individual filers: If your combined income falls between $25,000 and $34,000, you may pay income tax on up to 50% of your Social Security benefits. If you earn more than $34,000, you may pay income tax on up to 85% of your benefits.
For married couples filing jointly: If you and your spouse have a combined income between $32,000 and $44,000, up to 50% of your Social Security benefits may be subject to income tax. If your combined income is greater than $44,000, up to 85% of your benefits may be subject to income tax.
For married couples filing individually: No matter your combined income, it is possible you may pay income tax on up to 85% of your Social Security benefits.
Several states also tax Social Security benefits to varying degrees. Some follow the same formula shared above, while others have their own set of rules and income requirements. These states include:2
- New Mexico
- Rhode Island
- West Virginia
How to Calculate Your Combined Income
To determine what your combined income is, the IRS provides the following formula:3
Your adjusted gross income + nontaxable interest + half of your Social Security benefits = Your combined income
If you’d like assistance with determining the tax status of your benefits, the IRS offers an online tool for calculating this formula.
How Do You Pay Taxes on Social Security?
In January, you’ll get a Social Security Benefit Statement in the mail. This will outline how much in benefits you received during the previous year. As you start working on your federal income tax return, you and your accountant will use this information to fill out the combined income formula. If you earn above the limits, you know that a portion of your benefits will be subject to income tax.
You have two choices for paying taxes on your Social Security benefits. You can either make quarterly (or estimated) tax payments throughout the year, or you can opt to have federal taxes withheld from your benefits.
Quarterly taxes are due on the following dates (or the next business day if it falls on a weekend or holiday):
- April 15
- June 15
- September 15
- January 15 (of the following year)
Similar to when you worked for an employer, you can choose to have your taxes withheld upfront. The benefit of this is that no quarterly tax payments are needed. If this is the route you’d like to take, you must complete a Form W-4V from the IRS and indicate what percentage of your monthly benefit you’d like to have withheld: 7%, 10%, 12%, or 22%.
Can Taxes on Social Security Be Avoided?
Because taxes on Social Security are based on your combined income, you may want to focus on attempting to manage the factors that make up your combined income.
If you’re still earning a paycheck, that may account for a major part of your combined income. So consider whether it’s right for you to start collecting Social Security benefits while you’re still earning an income, or if it's possible to delay benefits until your AGI is expected to be lower.
In a similar vein, you and your financial professional should discuss your retirement income strategy while considering your Social Security benefits. Any income from nontaxable interest, as mentioned above, may increase your combined income.
The Advantages of Delaying Your Social Security Benefits
You are eligible to start receiving retirement benefits at age 62, but your full retirement age will depend on the year you were born. If you’re born in 1960 or later, this will be 67. If you were born before 1960, refer to the Social Security Administration’s age chart to determine your full retirement age.4
As a general rule, the sooner you start receiving benefits before reaching full retirement age, the less per month you’ll receive.
Here’s an example to demonstrate taking your benefits early:5
Say someone is set to receive $1,000 a month at full retirement age (67) and their spouse would receive $500 a month in spousal benefits. If they choose to start receiving those benefits at age 62 instead (60 months early), Social Security says the payout would reduce to $700 a month (a 30% decrease) and $325 a month for their spouse (a 35% decrease).
Each month you wait to begin receiving benefits, the calculation changes.
If you’re able to delay Social Security benefits even after you’ve reached full retirement age, Social Security has structured benefits to increase by 0.7% per month, up until you turn 70.
From our example above, if you waited until age 70 to start receiving payments, your $1,000 would turn into $1,320 per month.
Keep in mind that delaying your Social Security payments can both grow your payments and help manage your tax obligation if you’re still earning additional income from a job or other sources.
Addressing Your Potential Tax Obligations
Over half of Americans must pay income taxes on their Social Security benefits, which means it’s likely you fit into this category. The good news is that this is something we can prepare for together when creating your withdrawal and income strategies for retirement.
1 IRS.gov, 2022
2 AARP.org, 2022
3 SSA.gov, 2022
4 SSA.gov, 2022
5 SSA.gov, 2022
This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.
The content is developed from sources believed to be providing accurate information. This material was developed and produced by FMG Suite to provide information on a topic that may be of interest. FMG Suite, LLC, is not affiliated with the named representative, broker-dealer, state- or SEC-registered investment advisory firm. The opinions expressed and material provided are for general information and should not be considered a solicitation for the purchase or sale of any security.