Written by Hi, it’s Dre Griggs with Obsidian Wisdom. Today, we’re answering the big question: How is Social Security taxed in retirement?
The Reality of Social Security Taxation
You and I both know it would make sense if Social Security wasn’t taxed, right? We’ve already paid into the fund, and now we’re just getting back the money we put in. But the government doesn’t see it that way.
The government is pretty interested in taxing our Social Security benefits, and it’s surprisingly easy to fall into that taxable category. Many people don’t expect their Social Security to be taxed, but it can be, especially at the federal level.
State vs. Federal Taxation
While some states don’t tax Social Security, the federal government does. It’s important to check your own state’s policies. For example, here in Florida, we don’t have state income taxes, so there’s no state tax on Social Security. But we still need to understand how it works federally.
Case Study: John and Mary Smith
To make things clearer, let’s look at a case study.
- John and Mary Smith live in Florida.
- John, 65, is a retired engineer, and Mary, 63, is a retired teacher.
- They have $1.1 million in combined retirement savings, pensions (John receives $30,000 per year, and Mary gets $15,000),
- $55,000 in annual Social Security benefits ($30,000 for John and $25,000 for Mary).
- They also have $10,000 in other investment income.
Understanding Social Security Taxation
Basic Rules
Not all Social Security benefits are taxable. Whether your benefits are taxable depends on your combined income and your filing status. Your combined income includes:
- Your Adjusted Gross Income (AGI)
- Non-taxable interest (like municipal bonds)
- Half of your Social Security benefits
When you add these together, you get your provisional income.
Tax Thresholds
| TAX FILING STATUS | PROVISIONAL INCOME | SOCIAL SECURITY TAXATION |
| SINGLE OR HEAD OF HOUSEHOLD | Less than $25,000 | 0% |
| $25,000 – $34,000 | Up to 50% | |
| More than $34,000 | Up to 85% | |
| JOINT FILERS | Less than $32,000 | 0% |
| $32,000 – $44,000 | Up to 50% | |
| More than $44,000 | Up to 85% |
Here’s a quick breakdown:
- Single or Head of Household:
- Over $25,000/year to $34,0000/year: Up to 50% of Social Security benefits taxable
- Over $34,000/year: Up to 85% taxable
- Joint Filers:
- Over $32,000/year to $44,000/year: Up to 50% taxable
- Over $44,000/year: Up to 85% taxable
John and Mary’s Example
John and Mary’s combined income is calculated as follows:
- Annual pension: $45,000 ($30,000 (John) + $15,000 (Mary))
- Other investment income: $10,000
- Non-taxable interest: $1,000
- Half of Social Security benefits: $27,500 ($55,000 ÷ 2)
Their provisional income is $83,500.
Since their provisional income exceeds the $44,000 threshold for joint filers, up to 85% of their Social Security benefits can be taxed.
Calculating the Taxable Portion
For John and Mary, 85% of their Social Security benefits (0.85 * $55,000 = $46,750) will be added to their AGI ($55,000 pension + $10,000 investment income), totaling $101,750 in taxable income. This amount is then subject to federal tax rates.
Tax Brackets
In 2024, the tax brackets range from 10% to 37%.
| Tax Rate | Single | Married Filing Jointly | Married Filing Separately | Head of Household |
| 10% | $0 to $11,600 | $0 to $23,200 | $0 to $11,600 | $0 to $16,550 |
| 12% | $11,601 to $47,150 | $23,201 to $94,300 | $11,601 to $47,150 | $16,551 to $63,100 |
| 22% | $47,151 to $100,525 | $94,301 to $201,050 | $47,151 to $100,525 | $63,101 to $100,500 |
| 24% | $100,526 to $191,950 | $201,051 to $383,900 | $100,526 to $191,950 | $100,501 to $191,950 |
| 32% | $191,951 to $243,725 | $383,901 to $487,450 | $191,951 to $243,725 | $191,951 to $243,700 |
| 35% | $243,726 to $609,350 | $487,451 to $731,200 | $243,726 to $365,600 | $243,701 to $609,350 |
| 37% | $609,351 or more | $731,201 or more | $365,601 or more | $609,350 or more |
Here’s how John and Mary’s taxable income breaks down:
- 10% Bracket: First $23,200 taxed at 10% = $2,320 ($23,200 * 0.10)
- 12% Bracket: Next $71,100 taxed at 12% = $8,532 (($94,300 – $23,200) * 0.12)
- 22% Bracket: Remaining $7,450 taxed at 22% = $1,639 (($101,750 – $94,300) * 0.22)
- Total: $2,320(10%) + $8,532(12%) + $1,639(22%) = $12,491
So, the total federal tax liability on $101,750 would be $12,491
Strategies to Minimize Taxes
1. Manage Provisional Income
Consider delaying Social Security benefits or using Roth conversions to avoid higher tax brackets in early retirement years.
2. Utilize Health Savings Accounts (HSAs) and Roth IRAs
HSAs offer triple tax benefits: contributions are tax-free, growth is tax-free, and withdrawals for qualified healthcare expenses are tax-free. Similarly, Roth IRAs grow tax-free, and withdrawals don’t count as provisional income.
3. Consult Professionals
Work with both a financial planner and a CPA to develop tax-efficient strategies, such as tax loss harvesting and coordinating withdrawals.
Final Thoughts
Understanding how your different income streams in retirement can be taxed is crucial. You might think you have enough income, but without considering taxes, you might fall short of your retirement goals. By planning and using the right strategies, you can keep more of your money and live your best retirement life.
Sources: States that don’t tax retirement income
Image from Freepik.com