Some people are unaware that Social Security income is subject to tax. But a portion of it is and understanding how that income is taxed is a crucial part of successful financial planning in retirement—especially since you live on a fixed income. Federal tax on Social Security income is due regardless of where you live. State income tax is determined by requirements of the state within which you reside.
This article explains the general process for determining federal and state income taxes on Social Security income. The last thing you want is to be hit with an unexpected high tax bill when it’s time to file your return.
Federal Tax on Social Security Income
If your income level from all sources in retirement is high enough, you can expect to pay taxes on up to 85 percent of your Social Security income. Your combined income level from all sources dictates the percentage of your Social Security income that is taxed.
Your combined income (or provisional income) as defined by the IRS includes the sum of a few things. You must calculate your wages, taxable and nontaxable interest, dividends (if any) pensions, self-employment income, and any other taxable income, plus 50 percent of your annual Social Security income to determine your provisional income.
If your total provisional income falls above the threshold, you’ll pay tax on 85 percent of your Social Security income. If it falls below the threshold, that percentage is adjusted accordingly.
For example, for the 2020 tax year, if you file as single reporting between $25,000 and $34,000 in income, up to 50 percent of your Social Security income incurs a tax liability. If your income exceeds $34,000, then up to 85 percent of your Social Security income is taxed. But, if your income is less than $25,000, you won’t owe federal tax on your Social Security income.
If you are married and file a joint return and your combined income falls between $32,000 and $44,000, up to 50 percent of your Social Security income is taxed. If your combined income exceeds $44,000, then you’ll owe tax on up to 85 percent of your Social Security income. And, of course, if your income is below $32,000, your Social Security income won’t be taxed.
There are different apps available to calculate your Social Security income tax bracket. However, typical calculators provide an estimate to use as guidance. Always consult with your financial advisor or tax professional to determine your tax bracket based on your individual situation.
State Tax on Social Security Income
State income tax on Social Security income varies by state. Not all states impose tax liability on Social Security income.
If you live in one of these 37 states or in the District of Columbia, you don’t owe tax on your Social Security income—because either the state’s themselves don’t charge state tax or they don’t tax Social Security income:
Alabama, Alaska, Arizona, Arkansas, California, Delaware, Florida, Georgia, Hawaii, Idaho, Illinois, Indiana, Iowa, Kentucky, Louisiana, Maine, Maryland, Massachusetts, Michigan, Mississippi, New Hampshire, New Jersey, New York, Nevada, North Carolina, Ohio, Oklahoma, Oregon, Pennsylvania, South Carolina, South Dakota, Tennessee, Texas, Virginia, Washington, Wisconsin, and Wyoming.
The remaining 13 states do charge state income tax on Social Security income. Of those 11, only Utah and New Mexico follow the federal taxation guidelines outlined above. The rest have different rules for attributing their state’s tax on Social Security income, so make sure you consult with your tax professional or financial advisor on guidance for calculating tax you may owe. You can also call your state’s tax agency department with questions.
Planning Ahead for Your Social Security Income Tax Liability
Just knowing what you owe Social Security tax isn’t enough if you don’t have a plan in place to save the amount so you can pay it come tax time. And, there are a few strategies to help you prepare.
When you begin taking benefits, you can choose to have tax withheld from your Social Security payments. You can choose the tax rate of 7%, 10%, 12%, or 22%. But if you elect voluntarily withholding, keep in mind that all of your Social Security income will be taxed—not just a percentage as described in this article.
You can also report the tax on your quarterly estimates to help relieve the big burden when April 15 rolls around.
If you prefer to save this money throughout the year, work with your tax professional to project your combined income and the tax you’ll owe on your Social Security income. Incorporate this number into your retirement planning so that you can put the money away until it’s time to pay taxes. Your tax professional is your biggest ally in helping you determine your threshold for this purpose.
This article was written for information purposes only and should not be considered as tax, financial, or legal advice.