This question pops up quite a bit when discussing retirement with friends and/or clients. The short answer is yes, social security benefits are taxable. Of course, when dealing with the U.S. Tax Code, trying to figure out how much that you have to pay is complicated, to say the least.
To start, the IRS uses your combined income to determine taxes on your social security benefits. Your combined income is your adjusted gross income + nontaxable interest + half of your social security benefits. If you have no other income except from social security, then you won’t have to pay any federal taxes. For everyone else, here’s how to know if your social security benefits are taxable:
- For individuals:
- If you have a combined income between $25,000 and $34,000, you are taxed on 50% of your social security benefit.
- If your combined income exceeds $34,000, 85% of your social security benefit could be taxable.
- For married couples:
- Married couples are taxed on 50% of their social security benefits if their combined income is between $32,000 and $44,000.
- Up to 85% of social security benefits is taxable for married couples with a combined income that exceeds $44,000.
As you can see from above, the threshold is very low before you’ll be paying taxes on your benefits. On the state level, only 13 states tax social security benefits: Colorado, Connecticut, Kansas, Minnesota, Missouri, Montana, Nebraska, New Mexico, North Dakota, Rhode Island, Utah, Vermont, and West Virginia. By the way, WV is off this list in 2022.
Please let me know if you have any questions.
Joe Baker, CFP®
Baker Asset Management, LLC
joebaker@bakerassetmanagement.com
