Taxes on Social Security Benefits

Federal Taxes on Social Security Benefits

Social Security benefits can be subject to federal income tax if your income exceeds a certain threshold. The amount of your Social Security benefits that are subject to tax depends on your combined income, which is calculated as follows:

• Adjusted Gross Income (AGI): This is your income from all sources, including wages, interest, dividends, and any other taxable income.
• Nontaxable Interest: This includes interest income that is not subject to federal income tax, such as interest from municipal bonds.
• Half of Your Social Security Benefits: This is the amount of your Social Security benefits that is included in your income for tax purposes.

To determine whether your Social Security benefits are subject to tax, you must add up your AGI, nontaxable interest, and half of your Social Security benefits. If the total is above a certain threshold, a portion of your Social Security benefits may be subject to federal income tax.

Income Threshholds

The income thresholds for Social Security tax depend on your filing status. For 2021, the income thresholds are as follows:

• Single: If your combined income is between $25,000 and $34,000, up to 50% of your Social Security benefits may be subject to tax. If your combined income is above $34,000, up to 85% of your benefits may be subject to tax.
• Married Filing Jointly: If your combined income is between $32,000 and $44,000, up to 50% of your Social Security benefits may be subject to tax. If your combined income is above $44,000, up to 85% of your benefits may be subject to tax.

If you are married but file separately, you will almost always pay taxes on your Social Security benefits.

It's important to note that these income thresholds are not adjusted for inflation, so more and more retirees are finding that their Social Security benefits are subject to tax. However, even if your Social Security benefits are subject to tax, you may still be able to minimize your tax liability by managing your income sources and taking advantage of deductions and credits.

Strategies

One strategy for minimizing taxes on Social Security benefits is to spread out your retirement account withdrawals over several years, rather than taking large withdrawals all at once. This can help keep your combined income below the threshold and reduce your tax liability.

Another strategy is to invest in tax-free investments, such as municipal bonds. These investments are not subject to federal income tax, so they can provide a source of income that does not increase your combined income for Social Security tax purposes.

Finally, you may be able to take advantage of deductions and credits to reduce your overall tax liability. For example, you may be able to deduct medical expenses, charitable contributions, and state and local taxes on your federal income tax return.

By understanding the income thresholds and implementing tax planning strategies, you can minimize your tax liability and maximize your retirement income

If you do have to pay taxes on your Social Security benefits, you can make quarterly estimated tax payments to the IRS or choose to have federal taxes withheld from your benefits.

State Taxes on Social Security

In addition to federal income tax, some states also impose taxes on Social Security benefits. However, the rules for state taxes on Social Security benefits vary widely from state to state. Here's what you need to know:

States That Do Not Tax Social Security Benefits

There are currently 37 states that do not tax Social Security benefits. These states include Alabama, Arizona, Arkansas, California, Delaware, Florida, Georgia, Hawaii, Idaho, Illinois, Indiana, Iowa, Kentucky, Louisiana, Maine, Maryland, Massachusetts, Michigan, Mississippi, Nevada, New Hampshire, New Jersey, New York, North Carolina, Ohio, Oklahoma, Oregon, Pennsylvania, South Carolina, Tennessee, Texas, Virginia, Washington, Wisconsin, and Wyoming.

States That Fully Tax Social Security Benefits

There are currently 13 states that fully tax Social Security benefits. These states include Colorado, Connecticut, Kansas, Minnesota, Missouri, Montana, Nebraska, New Mexico, North Dakota, Rhode Island, Utah, Vermont, and West Virginia.

States That Partially Tax Social Security Benefits

There are also some states that partially tax Social Security benefits. These states include:

• Arkansas: Taxes Social Security benefits for individuals with a combined income of $25,000 or more ($32,000 for married couples).
• Iowa: Taxes Social Security benefits for individuals with a combined income of $25,000 or more ($32,000 for married couples).
• Kentucky: Taxes Social Security benefits for individuals with a combined income of $41,110 or more ($82,220 for married couples).
• Missouri: Taxes Social Security benefits for individuals with a combined income of $85,000 or more ($100,000 for married couples).
• Nebraska: Taxes Social Security benefits for individuals with a combined income of $43,000 or more ($58,000 for married couples).
• Ohio: Taxes Social Security benefits for individuals with a combined income of $25,000 or more ($32,000 for married couples).
• South Dakota: Taxes Social Security benefits for individuals with a combined income of $32,000 or more ($64,000 for married couples).
• Vermont: Taxes Social Security benefits for individuals with a combined income of $45,000 or more ($60,000 for married couples).
• Wisconsin: Taxes Social Security benefits for individuals with a combined income of $25,000 or more ($32,000 for married couples).

It's important to note that the rules for state taxes on Social Security benefits can change, so it's always a good idea to consult with a tax professional or check with your state's tax authority for the most up-to-date information.