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Living in retirement

Social Security and paying taxes in retirement

Income taxes on Social Security benefits? It's true. Careful planning can take away the sting if you have to pay.
7 minute read

Points to know

  • Retirees with moderate or higher incomes likely will pay federal taxes on some portion of their benefits.
  • Thirteen states also impose a state income tax on Social Security benefits.
  • Carefully consider the possibility of taxation of your Social Security benefits when designing a strategy for retirement income.

Will you owe taxes on your Social Security benefits?

As with most questions about taxes, the answer is "it depends."

About 40% of people who get benefits pay income taxes on them, according to the Social Security Administration (SSA). That's because their income in retirement exceeds limits set by tax rules and regulations.

Generally, if Social Security is your only retirement income, you won't have to pay taxes on it. But if you have at least moderate income, you'll most likely owe the government some money.

The good news is that while up to 85% of your benefits may be taxed at ordinary income rates, it's never 100%. That's considered tax-efficient compared with other retirement plans whose distributions may be fully taxable. In addition to the federal tax bite, 13 states also tax Social Security benefits using either the federal provisional income formula or their own.

States that tax your Social Security income

What's the provisional income formula?

Whether you'll owe taxes on your benefits is based on a provisional income (PI) formula: your modified adjusted gross income (AGI) plus tax-exempt bond interest plus half of your Social Security benefits.

Social Security income limits

FILING STATUS PROVISIONAL INCOME THRESHOLD % OF TAXABLE BENEFITS
Single; head of household; qualifying widow/widower; married, filing separately (spouses lived apart for all of the tax year) $0 to $25,000
>$25,000
>$34,000
0% Up to 50% Up to 85%
Married, filing jointly $0 to $32,000
>$32,000
>$44,000
0% Up to 50% Up to 85%
Married, filing separately (spouses lived together at any time during the year) $0 Up to 85%

FILING STATUS

Single; head of household; qualifying widow/widower; married, filing separately (spouses lived apart for all of the tax year)
 

PROVISIONAL INCOME THRESHOLD

$0 to $25,000

>$25,000

>$34,000
 

% OF TAXABLE BENEFITS

0%

Up to 50%

Up to 85%



FILING STATUS

Married, filing jointly
 

PROVISIONAL INCOME THRESHOLD

$0 to $32,000

>$32,000

>$44,000
 

% OF TAXABLE BENEFITS

0%

Up to 50%

Up to 85%



FILING STATUS

Married, filing separately (spouses lived together at any time during the year)
 

PROVISIONAL INCOME THRESHOLD

$0
 

% OF TAXABLE BENEFITS

Up to 85%


Source: Internal Revenue Service Publication 915, Social Security and Equivalent Railroad Retirement Benefits

How it works

The amount of Social Security income that's taxable is the smallest of the following 3 calculations.

  1. 85% of Social Security benefits.
  2. 50% of Social Security benefits + 85% of excess PI over $34,000 (for single recipients) or $44,000 (for married recipients, filing jointly).
  3. 50% of excess PI over $25,000 (for single recipients) or $32,000 (for married recipients, filing jointly) + 35% of excess PI over $34,000 (for single recipients) or $44,000 (for married recipients, filing jointly).

At the end of the year, Social Security will send you a statement of your benefits for you to use when completing your federal income tax return.

Did you know?

You can ask the government to withhold taxes from your benefit payment, although you're not required to do so. If you'll owe taxes, withholding has 2 advantages: You won't have to pay a lump sum at tax time, and you'll avoid a potential penalty for underpaying your taxes.

You could also satisfy your tax bill by having taxes withheld from other income sources, such as IRAspensions, or annuities, or by making quarterly payments to the Internal Revenue Service (IRS). You may want to consult a tax advisor.

Create a tax-efficient Social Security strategy

Your decision about when to claim Social Security should include tax efficiency as a factor—that is, how much taxable income you retain after paying applicable income taxes.

Generally, your Social Security income will have a more favorable tax treatment than retirement income from accounts such as traditional IRAs or 401(k)s.

That's because you'll never pay taxes on 100% of your benefits, whereas you'll pay your ordinary tax rate on income from other retirement accounts unless you've selected a Roth IRA.

Learn about traditional & Roth IRAs

Taking tax efficiency into account can help you decide whether it's advantageous to delay claiming Social Security benefits and determine the best way to tap into your sources of income to meet your cash flow needs in retirement.

Managing how much of your income comes from Social Security versus other sources can make a big difference in your ability to support your long-term retirement plan.

Consider these strategies

The longer you wait to claim Social Security benefits, the better chance you'll have to boost the overall tax efficiency of your retirement income plan. Here's how.

Drawing down traditional tax-deferred assets before collecting Social Security can enable you to control both your current and future taxes.

The amount you withdraw from a traditional IRA, for example, lowers your account balance, which may reduce your future required minimum distributions (RMDs).

Since your RMD is considered ordinary income, having smaller distributions while you're collecting benefits may reduce the taxes on your benefits—or keep you from paying taxes altogether.

In addition, managing your retirement income in this way can also help you qualify to pay lower Medicare parts B and D premiums, which are income-based.

See how one couple maximized their after-tax retirement income

Find out how to set up tax-efficient withdrawals from taxable retirement accounts

The longer you wait to claim Social Security benefits, the better chance you'll have to boost the overall tax efficiency of your retirement income plan. Here's how.

Drawing down traditional tax-deferred assets before collecting Social Security can enable you to control both your current and future taxes.

The amount you withdraw from a traditional IRA, for example, lowers your account balance, which may reduce your future required minimum distributions (RMDs).

Since your RMD is considered ordinary income, having smaller distributions while you're collecting benefits may reduce the taxes on your benefits—or keep you from paying taxes altogether.

In addition, managing your retirement income in this way can also help you qualify to pay lower Medicare parts B and D premiums, which are income-based.

See how one couple maximized their after-tax retirement income

Find out how to set up tax-efficient withdrawals from taxable retirement accounts

If you want to create a financial legacy for your heirs, plan your retirement income strategy to leave them tax-efficient dollars. Here's an order to follow:

  • Assets held in Roth accounts are the most tax-efficient dollars to inherit since any distribution an heir receives will be income tax-free.
  • Assets in taxable accounts are the next most tax-efficient to inherit because the cost basis of the investments will be stepped up for the beneficiary, alleviating capital gains taxes.
  • Assets in tax-deferred accounts, such as traditional IRAs, are less tax-efficient to inherit because any withdrawal a beneficiary takes will be taxed at his or her ordinary income tax rate.

GET YOUR SOCIAL SECURITY ESTIMATES

The SSA website provides estimates for how much you'll collect if you start receiving benefits at age 62, your full retirement age (FRA) (between 66 and 67), and age 70.

A Vanguard advisor can help

If you're struggling with making your best Social Security decision, we can help. You'll also get a custom financial plan, ongoing portfolio management, investment coaching, and real-time goal tracking—all at a low cost.

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