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.
Also known as the marginal tax rate, the income tax rate at which the last dollar of an individual's income is taxed. Under federal law, the individual pays a lower tax rate on his or her first dollar of income than on his or her last dollar. The marginal rate—the highest rate at which the individual's income is taxed—is used to calculate taxes due on investment income.
Most states don't tax Social Security benefits. But the ones that do either follow the same federal provisional income (PI) rules or have special rules and income thresholds to determine what's taxable.
These 4 states use the federal PI formula: Minnesota, North Dakota, Vermont, and West Virginia. The taxable portion of Social Security for these states is the same as the federal amount.
Nine states have special rules and income thresholds. Most use the federal modified adjusted gross income formula rather than the federal PI formula for taxing Social Security income.
These states are: Colorado, Connecticut, Kansas, Missouri, Montana, Nebraska, New Mexico, Rhode Island, and Utah.
If you live in a state that counts Social Security benefits as taxable income, you should consult your state tax department for details and a qualified tax advisor.
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.
The level of income used to determine whether someone is liable for income tax on his or her Social Security benefits and how much is subject to tax.
Also known as the marginal tax rate, the income tax rate at which the last dollar of an individual's income is taxed. Under federal law, the individual pays a lower tax rate on his or her first dollar of income than on his or her last dollar. The marginal rate—the highest rate at which the individual's income is taxed—is used to calculate taxes due on investment income.
The amount on which someone pays income tax. It's calculated by subtracting authorized deductions from gross income.
| 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
The amount of Social Security income that's taxable is the smallest of the following 3 calculations.
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.
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 IRAs, pensions, or annuities, or by making quarterly payments to the Internal Revenue Service (IRS). You may want to consult a tax advisor.
A type of account created by the IRS that offers tax benefits when you use it to save for retirement.
An arrangement under which an employer—and sometimes the employee—makes payments toward retirement, disability, or death benefits for employees who meet certain criteria. Types of pension plans include defined benefit plans, defined contribution plans, employee stock ownership plans, money purchase plans, profit-sharing plans, stock bonus plans, thrift plans, and target benefit plans.
A financial product typically used by investors to save tax-deferred for retirement or to generate regular income payments in retirement.
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.
A type of employer-sponsored retirement plan that allows employees to contribute pre-tax dollars by deferring salary. Many plans offer a variety of investment options, and employers often match a percentage of employee contributions.
A type of IRA that allows you to make after-tax contributions (so you don't get an immediate tax deduction) and then withdraw money in retirement tax-free as long as you meet the requirements.
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:
Delaying the payment of income taxes on income. For example, owners of traditional IRAs don't pay income taxes on the interest, dividends, or capital gains accumulating in their retirement accounts until they begin making withdrawals.
Under federal tax law, most owners of IRAs (except Roth IRAs) must withdraw part of their tax-deferred savings each year, starting at age 72 (age 70½ if you attained age 70½ before 2020). If you withdraw less than your RMD, you may owe a 50% penalty tax on the difference. RMDs are intended to ensure that the assets in these types of accounts are eventually subject to taxation.
Medicare Part B covers doctors' office visits, lab work, X-rays, some medical supplies, and preventive services. Medicare Part D offers prescription drug coverage.
The following scenarios illustrate how taking Social Security benefits early versus delaying until age 70 affects the federal taxes of this married couple, who are both age 62.
Scenario 1: Taking benefits at age 62
Michael and Patricia anticipate a pre-tax retirement income of $75,000, consisting of $24,000 from their Social Security benefits and $51,000 in taxable distributions from their IRAs.
Based on their earnings history at age 62, 85% of their Social Security benefits would be taxable.
Assuming no other income and using the standard deduction, Michael and Patricia would owe $5,307 in federal taxes. Their after-tax income is $69,693.
Scenario 2: Delaying benefits until age 70
In the years between their retirement and age 70, Michael and Patricia would need to take additional taxable distributions from their IRAs.
But at age 70, they'd receive $42,240 in Social Security benefits, meaning they'd need only $32,760 in IRA withdrawals, including required minimum distributions (RMDs).
Using the same assumptions (no additional income and the standard deduction), only 34% of the couple's Social Security benefits would be taxable, and their federal taxes would total $2,086. Their after-tax income would be $72,914.
In this scenario, their total taxes would be slightly higher in the years before they claim Social Security benefits, but lower taxes after age 70 would offset the initial tax cost in less than 2 years.
Social Security claiming strategies at a glance
The following scenarios illustrate how taking Social Security benefits early versus delaying until age 70 affects the federal taxes of this married couple, who are both age 62.
Scenario 1: Taking benefits at age 62
Michael and Patricia anticipate a pre-tax retirement income of $75,000, consisting of $24,000 from their Social Security benefits and $51,000 in taxable distributions from their IRAs.
Based on their earnings history at age 62, 85% of their Social Security benefits would be taxable.
Assuming no other income and using the standard deduction, Michael and Patricia would owe $5,307 in federal taxes. Their after-tax income is $69,693.
Scenario 2: Delaying benefits until age 70
In the years between their retirement and age 70, Michael and Patricia would need to take additional taxable distributions from their IRAs.
But at age 70, they'd receive $42,240 in Social Security benefits, meaning they'd need only $32,760 in IRA withdrawals, including required minimum distributions (RMDs).
Using the same assumptions (no additional income and the standard deduction), only 34% of the couple's Social Security benefits would be taxable, and their federal taxes would total $2,086. Their after-tax income would be $72,914.
In this scenario, their total taxes would be slightly higher in the years before they claim Social Security benefits, but lower taxes after age 70 would offset the initial tax cost in less than 2 years.
Social Security claiming strategies at a glance
The original cost of an investment (adjusted for commissions or capital distributions). For tax purposes, the cost basis is subtracted from the investment's value at the time of sale, minus fees and commissions, to determine any capital gain or loss.
The cost basis of the account that you're inheriting refers to how much the account owner paid for the investments in the account. The stepped-up cost basis is the cost basis adjusted to the fair market value available when you inherit the assets.
You may benefit from a stepped-up cost basis if the fair market value of the investments on the day the account owner died is more than the account owner paid for the investments. Because of the step-up, you may be able to avoid or minimize capital gains taxes if you sell the investments.
Consult with a tax advisor if you have questions about the IRS rules regarding stepped-up cost basis.
The person or entity designated to receive the proceeds of a pension, investment account, annuity contract, or insurance policy in the event of the owner's death.
An increase in the value of an investment over the initial purchase price. A capital gain is "unrealized" until the investment is sold, when it becomes a "realized" gain. Realized gains are taxable, but the tax burden is deferred if you hold the investment in an IRA or a 401(k).
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.
The age at which you're eligible for your full monthly benefits, also known as the primary insurance amount (PIA). The Social Security Administration sometimes refers to full retirement age as "normal retirement age" (NRA).
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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