You’ve been paying into Social Security your whole working life, and now you may be curious if those taxes will be taxed. Well, as with anything involving taxes, there’s not one simple answer (no shocker there).
But stick around with us and we’ll help you understand if you have to pay taxes on your Social Security benefits and how much you’ll have to pay.
How Does Social Security Work?
Let’s make sure we’re on the same page here. When you earn income, your employer automatically takes out Social Security taxes based on what you earn. The higher your income, the more you owe Uncle Sam. As of 2020, the max amount of your earnings that can be taxed for Social Security is $137,700.1 That means that—if you’re not self-employed—any income earned above $137,700 doesn’t get taxed.
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Now, this part may come as a surprise—the money that gets taken out of your paycheck for Social Security does not go into your own personal Social Security savings account. You’re not putting money away like you would with a 401(k). The IRS is taking this money, dumping it into one big bag, and dishing it out to people who are currently receiving Social Security benefits.
Still confused? You can learn more about how Social Security works here.
Is Social Security Income Taxable?
Short answer—it depends. But the gist of it is that the amount your Social Security benefits get taxed depends on how much you’re receiving from other sources of income in addition to your Social Security benefits. What does that mean, exactly?
The amount your Social Security benefits get taxed depends on how much you’re receiving from other sources of income in addition to your Social Security benefits.
For individuals, you’ll pay Social Security taxes if your total income is greater than $25,000. If you’re married, you’ll pay taxes if your total income is greater than $32,000.
How to Calculate Your Social Security Tax
If you’re planning to tap into your Social Security retirement benefits this year, you can figure out how much of it will be taxed based on how you file and your income amount.
When January rolls around you should receive an SSA-1099 form from the IRS. This form basically tells you how much Social Security you’ve received for the entire year and you’ll use it to calculate how much you’ll owe in Social Security taxes.
Individual Social Security Tax Rates
If you’re a single filer, and your combined income for the entire year is between $25,000 and $34,000, then up to 50% of your benefits will be taxed. Side note—if you bring in more than $34,000, that percentage goes up to 85%.2
Let’s look at an example. Let’s say you bring in $65,000 in annual income and you receive $1,750 a month in Social Security benefits. Because you’re bringing in more than the $34,000 threshold for single filers, you’ll pay taxes on 85% of your $21,000 in annual benefits—or $17,850 ($21,000 x 85%).
Married Social Security Tax Rates
Alright, this one’s for you married folks out there. If you and your spouse’s combined income is between $32,000 and $44,000, then up to 50% of your benefits are taxed. Anything above $44,000 is taxed up to 85%.
For married folks who are filing separately, but have lived together at any point during the tax year, up to 85% of their Social Security benefits may be taxable (if you lived apart from your spouse for the whole year, the IRS treats you as a single filer).
Now, let’s say you and your spouse are filing together and bring in $42,000 in annual income including $1,000 a month in Social Security benefits ($12,000 for the whole year). Because your income is between $32,000 and $44,000, you’ll pay taxes on 50% of your $12,000 in annual benefits—or $6,000 ($12,000 x 50%).
Are All of My Social Security Benefits Taxed?
Ready for some good news? No—not all of your benefits will be taxed. (Whew, right?) You won’t ever pay taxes on more than 85% of your retirement benefits. So, let’s say you’re a single filer and your benefits are $35,000. You’ll pay taxes on $29,750 ($35,000 x 85%) which lands you in the 12% tax bracket for the 2020 tax year. (For 2020, federal income tax rates range from 10% to 37%.)
If you do end up having to pay taxes on your Social Security benefits, the IRS will let you make quarterly tax payments or you can choose to have federal income taxes withheld.
What if My State Has a Social Security Tax?
Now, we’ve been talking about federal income taxes. But there are currently 13 states that also have a Social Security tax.3 (Just when you thought things couldn’t get any more complicated, right?) Check with your state tax agency to get details on how your benefits are taxed if you live in one of those states.
Can I Retire With Just Social Security?
Social Security has a negative rate of return as a savings program—that really sucks. You’re basically putting your money into a program that gives you less than what you put in. Ugh. Folks—Social Security is not a retirement program.
It's also important to note that, right now, Social Security is only funded until 2034. So, it’s not a smart idea to bank on that as your sole source of income when you retire, or heaven forbid, become disabled and can’t work.
We recommend you have more than Social Security benefits. Look—we know that might sound impossible for some. But it’s not!
The fact is, Social Security was never meant to fully support you in retirement—it’s meant to supplement your retirement income. You’ve got to make a plan for your future and treat Social Security as the icing on the cake. And it’s never too early or too late to start saving for retirement. It’s what smart people do. Our SmartVestor program can connect you with a trustworthy pro who can help you reach your investing and retirement goals.
Get a Tax Pro!
As with every other tax topic, Social Security taxes can have you feeling like someone threw mud in your eyes. Reach out to a tax Endorsed Local Provider (ELP) to help you figure out how your benefits will impact your tax bill so you can kick back and enjoy your retirement years in peace.