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How Are Social Security Benefits Taxed?

Key Points
  • If you're taking Social Security and have other income, some of your benefits may be taxable.

  • The percentage of your annual benefits subject to ordinary income taxes depends on how much income you have.

  • If you jumped the gun on taking benefits and are now concerned about how much you may be taxed, you might be able to change your mind.

Dear Carrie,

Last year I started drawing Social Security at my full retirement age of 66 even though I'm still working full time. Do I have to pay income taxes on the Social Security benefits I received?

—A Reader

 

Dear Reader,

This is a question that stumps a lot of people because the answer depends on the particulars of each individual's situation. Someone whose only income is from Social Security wouldn't pay income taxes on their benefits. But someone like you who has other income could very well end up having a portion of your Social Security benefits taxed.

Unfortunately, like so much else regarding taxes, the situation is a bit complicated. That's because determining the taxable portion of your Social Security benefits requires a few additional calculations that hinge upon how much money you make.

IRS Publication 915 gives you a full explanation and worksheet examples to show how to calculate it all, but for simplicity's sake, here's a topline explanation that will hopefully give you a head start on understanding how the tax rules might apply to your situation.

It starts with your combined income

To find out if your benefits are taxable, you first have to determine what the IRS calls your "combined" or "provisional" income. This includes one half of your Social Security benefits plus all of your other income (salary, dividends, interest, retirement account distributions, etc.), and it even includes your tax-exempt interest.

When filing jointly, you and your spouse need to add together your incomes and Social Security benefits to get this total. Even if one spouse didn't receive Social Security benefits, you still have to add in that spouse's income.

If combined income is more than $25,000 for an individual or $32,000 for a couple, some of your benefits may be taxable.

Up to 85 percent of benefits may be taxed

The good news is that there's a limit on how much of your benefit may be taxed. Again, the IRS has set income thresholds to determine the percentage.

  • For single filers, the first $25,000 isn’t taxed. For combined income between $25,000 and $34,000, up to 50 percent of Social Security benefits may be subject to ordinary income taxes. For income above $34,000, up to 85 percent of benefits may be taxed.

  • For married filing jointly, the first $32,000 isn't taxed. For combined income between $32,000 and $44,000, up to 50 percent of Social Security benefits may be taxable. For income above $44,000, up to 85 percent of benefits may be taxed.

A couple of examples

Example A: Let's say you're single and you received $24,000 in Social Security benefits in 2019. Let's also say that you had $21,000 in additional income plus $500 in tax-exempt interest. Half of your benefits plus your other income would give you a combined income of $33,500. That would keep you below the $34,000 threshold, so only 50 percent of your benefits would be subject to income tax.

Example B: Now let's say you're married. You received $24,000 in Social Security benefits and your spouse received $12,000. You and your spouse also had additional income of $40,000 plus $2,000 in tax-exempt interest. Half of your combined benefits ($18,000) plus your other income would put you at $60,000—well over the top threshold of $44,000 for married filing jointly. In this case, up to 85 percent of your benefits would be subject to income tax.

Another option

From your question, it sounds as if you chose to collect Social Security at your full retirement age (FRA) of 66 even though you decided to keep working full time. That's fine, and you may be enjoying the extra income Social Security provides. However, if now that you see the potential tax consequences, you think perhaps you jumped the gun on collecting Social Security, you do have another option. The Social Security Administration (SSA) may let you change your mind.

If you've already reached your FRA and are collecting benefits, it can be pretty straightforward. All you have to do is ask the SSA to temporarily suspend your payments. You'll stop receiving monthly payments—and your benefits will continue to increase until age 70 unless you request reinstatement before that date. If your benefit payments are suspended, they will start automatically the month you reach age 70.

If you applied for benefits less than 12 months before changing your mind, you may be able to withdraw your application entirely and have it reinstated at a later date. The one catch is that you'd have to pay back any benefits you already received. Read more information here on the SSA website.

An important consideration in either case is that, when you suspend, benefits for anyone else drawing on your record, for instance spousal benefits, will also be suspended. (Benefits for ex-spouses are not affected.) Also, Medicare premiums would no longer be deducted. Instead, you'd be billed for them.

Also think about state taxes

Just for the record, the rules are different for state taxes on Social Security. Some states don't tax Social Security at all while others tax only a portion. Each state has its own limits, rules and thresholds. Best to get the details before taking any action.

Talk to your tax advisor

At this point, it would be a good idea to talk to your accountant or tax advisor. With some professional insight and the actual numbers in front of you, it will be easier to decide what to do—or at least it may make the taxes seem like less of a burden.

 

Have a personal finance question? Email us at askcarrie@schwab.com. Carrie cannot respond to questions directly, but your topic may be considered for a future article. For Schwab account questions and general inquiries, contact Schwab.

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The information provided here is for general informational purposes only and is not intended to be a substitute for specific individualized tax, legal or investment planning advice. Where specific advice is necessary or appropriate, consult with a qualified tax advisor, CPA, financial planner or investment manager. 

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