Is Social Security Taxable? Find out How the 2023 Rates are Calculated

While Social Security payments can be a significant source of income for many Americans, its important to know that their benefits may be subject to federal and state income tax. Most people undermine the tax liabilities of Social Security in retirement while concentrating on other retirement plans like 401(k)s, Individual Retirement Accounts (IRAs), mutual funds, etc. Consult with a professional financial advisor who can help you understand whether or not your benefits will be taxed, how they will be taxed, and ways to lower your tax output to maximize your retirement income.  

In this article, we will also explore whether Social Security is taxable and discuss the rules and guidelines that determine how much, if any, of your benefits are subject to taxation.

Do you pay taxes on Social Security?

Yes, you may have to pay taxes on Social Security in retirement. The amount you owe can depend on your overall income. Social Security is a government-administered program that provides financial assistance to retirees, disabled individuals, and certain other groups. It is offered under the Old Age, Survivors, and Disability Insurance (OASDI) program and is levied with the OASDI tax. As per the Internal Revenue Service (IRS) rules, you are liable to pay tax on only 85% of your Social Security benefits and not the entire check.

The IRS has set certain limits known as the base amount to calculate your tax liabilities on Social Security benefits. You will owe tax if your combined income is above the base limit. The limit can differ for different tax filing statuses and may change every year, subject to the rules of the IRS.

Here are the limits for 2023:

Tax filing status	Base amount for taxes on Social Security benefits
Single filers	$25,000
Head of household	$25,000
Qualifying widow or widower with a dependent child	$25,000
Joint filers	$32,000

 

The combined income refers to the total of your Adjusted Gross Income (AGI), non-taxable interest and one-half of your Social Security income. It can be calculated by using the following formula:

Combined Income = AGI + Non-taxable interest + 1/2 of Social Security benefits

The IRS uses the AGI to determine your income tax liability. It can include different types of incomes earned in a year, such as wages, interest, and dividends from investments, earnings from self-employment, Required Minimum Distributions (RMDs) from retirement accounts like 401(k), and any other taxable income. However, you can deduct payments, such as business expenses, student loan repayments, etc., from it.

How much of your Social Security income is taxable?

According to the Social Security Administration, here is how you can find out the amount of your Social Security income that is taxable:

 

1. If you file your tax return as an individual taxpayer

• Individual taxpayers filing as single filers with a combined income between $25,000 and $34,000 can pay tax on up to 50% of their total benefits.
• If your combined income is over $34,000, you can pay tax on up to 85% of your total benefits.

 

2. If you are a married taxpayer filing a joint return with your spouse

• If you and your spouse have a combined income between $32,000 and $44,000, you can pay tax on up to 50% of your total benefits.
• If you and your spouse have a combined income higher than $44,000, you can pay tax on up to 85% of your total benefits.

 

3. If you are a married taxpayer filing a separate tax return

• You will pay some tax on your benefits.

 

If you pay tax on at least 50% of your Social Security benefits, you can include the following as your taxable income in Form 1040, whichever is less:

• Half of your annual Social Security benefits
• Half of the difference between your combined income for the year and the base amount set by the IRS for the concerned year

 

State taxes on Social Security 

Apart from federal income tax, you may also have to pay state taxes on your Social Security income. These can differ for different states and may not apply to all states.

As of 2023, 12 states in the country levy Social Security taxes. These include:

1. Minnesota
2. Utah
3. Colorado
4. Connecticut
5. Kansas
6. Missouri
7. Montana
8. Nebraska
9. New Mexico
10. Rhode Island
11. Vermont
12. West Virginia

Out of these, the following 2 states charge the same state tax as the federal tax explained above:

1. Minnesota
2. Utah

The following 10 states partially tax you on your Social Security benefits:

1. Colorado
2. Connecticut
3. Kansas
4. Missouri
5. Montana
6. Nebraska
7. New Mexico
8. Rhode Island
9. Vermont
10. West Virginia

The following states do not charge any state tax on your Social Security benefits:

1. Alabama
2. Alaska
3. Arizona
4. Arkansas
5. California
6. Delaware
7. District of Columbia
8. Florida
9. Georgia
10. Hawaii
11. Idaho
12. Illinois
13. Indiana
14. Iowa
15. Kentucky
16. Louisiana
17. Maine
18. Maryland
19. Massachusetts
20. Michigan
21. Mississippi
22. Nevada
23. New Hampshire
24. New Jersey
25. New York
26. North Carolina
27. North Dakota
28. Ohio
29. Oklahoma
30. Oregon
31. Pennsylvania
32. South Carolina
33. South Dakota
34. Tennessee
35. Texas
36. Virginia
37. Washington
38. Wisconsin
39. Wyoming

SPONSORED WISERADVISOR

Social Security taxes on spousal, survivor, and disability benefits

Spousal, survivor, and disability benefits are different types of Social Security benefits provided to eligible individuals or their spouses and dependents.

1. Social Security taxes on spousal benefits 

Spousal benefits are a type of Social Security benefit that allows the lower-earning spouse of a married couple to receive a portion of the higher-earning spouse's Social Security retirement benefits. To be eligible, the lower-earning spouse must be at least 62, and the higher-earning spouse must have already started receiving their Social Security benefits. The spouse can also claim Spousal benefits if they have a qualifying child under 16 or a child who receives Social Security disability benefits under their care.

If you collect spousal Social Security benefits, you will pay income tax of up to 50% if your income is over $25,000 and up to 85% if your income is over $34,000. This is the same as if you were the primary Social Security recipient.

2. Social Security taxes on survivor benefits 

Survivor benefits are Social Security benefits paid to the surviving spouse or dependent children of a deceased worker who was eligible for Social Security.

To be eligible for survivor benefits, the deceased individual should have earned enough Social Security credits, and the surviving spouse or children must meet certain eligibility requirements, as explained below:

• A surviving spouse who is at least 60 years old or 50 years old if they have a disability can claim the benefits.
• A surviving divorced spouse under certain conditions or a surviving spouse of any age who may be caring for the deceased's child who is under 16 years old or has a disability and is receiving child's benefits, can claim the benefits.
• Spouses who remarry after 60 or 50 if they have a disability, can claim survivor benefits.
• An unmarried child of the deceased is eligible if they are under 18 or up to 19 years old if they are a full-time student in an elementary or secondary school.
• Children who are 18 years old or older with a disability that began before they turned 22 years old.
• Stepchild, grandchild, step-grandchild, or adopted children are all eligible for survivor benefits.
• Parents aged 62 or older dependent on the deceased (before death) for at least half of their financial support can also claim survivor benefits.

 

Survivor benefits are generally not taxed, especially when paid to children, as the chances of a child earning a taxable income are low. The same is true for parents or guardians who may be collecting the survivor benefits on behalf of the child. However, if the child earns a taxable income, they may be taxed. The base amount for a child is $25,000 as of 2023.

3. Social Security taxes on Disability benefits

Disability benefits are a type of Social Security benefit paid to individuals who have become disabled and cannot work. To be eligible to receive disability benefits, an individual must have a medical condition that prevents them from working. The condition must be expected to have been diagnosed a year before and should last for at least one year or result in death. Additionally, the individual must have earned enough Social Security credits to be insured for disability benefits.

Social Security disability benefits are taxed in the same manner as the primary retiree receiving the benefits. The taxes are calculated based on the recipient's combined income and tax filing status. The base amount as of 2023 is $25,000 for an individual taxpayer and $32,000 for a couple filing their taxes jointly.  

4 tips on reducing taxes on your Social Security income

While taxes are an inevitable part of your retirement income, there are some ways to lower them.

1. Reduce your overall taxable income

You can potentially reduce your taxable income in retirement by using tax-advantaged retirement accounts, such as Roth IRAs or 401(k)s. By using these accounts, you may be able to lower your Social Security tax liability since your overall taxable income will be low. However, be careful to follow all Roth account rules, such as withdrawing after 59.5 years and keeping the account active for at least five years before you make your first withdrawal. If not, you will attract a 10% penalty and applicable taxes.

2. Avoid working part-time in retirement

If you continue to work part-time, you will have a higher taxable income which can increase your Social Security taxes. Social Security taxes are assessed on all your earned incomes, so understand your tax output concerning your income inflows and then take up a job.

3. Move to a state with no Social Security tax

Some states do not levy state income taxes on Social Security benefits, which can help reduce your overall tax burden in retirement. Moving to one of these states may help you avoid Social Security taxes. The list of states with and without Social Security taxes has been shared above. You can refer to them and plan for your post-retirement home.

4. Plan your withdrawals carefully

Planning your withdrawals can help you lower your taxes by a great margin. It is important to be strategic with your distributions and not make all withdrawals together. For instance, you can consider delaying your Social Security benefits until after your full retirement age and earn delayed retirement credits that can increase your benefit by up to 8% annually. In the meantime, you can withdraw money from tax-free accounts like the Roth IRA or 401(k). This way, you will have enough financial liquidity to cover all your needs and save taxes. A lot of people claim their Social Security and other retirement distributions at the same time. If the latter comes from tax-deferred accounts like a traditional 401(k) or IRA, you risk being taxed on all your income at once. When you are in a higher tax bracket, the amount of tax is higher, and your returns are ultimately compromised. A financial advisor can help you plan your withdrawals better.

To conclude

The Social Security program can add great value to your retirement years. However, it is important to plan your withdrawals to maximize the benefits. Social Security tax is mandatory, and you must pay it at some point. Being up to date on taxes and how they are calculated is essential and highly recommended. The Social Security Administration offers plenty of resources and tools to compute and understand your tax liabilities. You can also hire a financial advisor if you need further assistance.  

Use the free advisor match service to find a financial advisor if you need help with understanding how much of your Social Security income is taxable. All you have to do is answer a few simple questions based on your financial needs, and the match tool will help connect you with 1-3 advisors best suited to meet your financial requirements.