How are Social Security Benefits Taxed?

How is social security income taxed?

This is not tax advice. Please consult with a tax accountant to make any tax calculations and decisions.

Social Security benefits are a crucial source of income for many retirees and disabled individuals in the U.S., yet many don’t understand the tax treatment of these benefits. Roughly 40% of people who draw on Social Security benefits must pay federal income tax. Having a clear understanding of how this tax is calculated can help guide households in making decisions about the optimal timing to begin receiving Social Security benefits.

The Formula

The precise numbers change each year, but the underlying formula for Social Security benefit taxation remains the same. To begin, you need to calculate your combined income. To do that, follow these steps:

• Start with your adjusted gross income (the amount you made for the year after above-the-line deductions, or “adjustments”).
• Add any nontaxable interest.
• Add half your social security benefit.

Based on your combined income, you may pay no benefits or, depending on the bracket you fall in, you may pay your marginal tax rate on either 50% or 85% of your benefits. For the most up-to-date tax tables, please refer to the Social Security administration website.¹

Things to consider

The timing of when you draw Social Security benefits can be crucial. Ensuring that you are taking calculated withdrawals from your retirement plans can minimize the taxation of your benefits. Further, withdrawals from Roth plans do not count towards your adjusted gross income, meaning that any distributions will not affect the taxation benefits.²

For help preparing for retirement and selective withdrawal strategies, call (802) 503-8280, email welcome@onedayinjuly.com, or fill out the form below.

1. https://www-origin.ssa.gov/benefits/retirement/planner/taxes.html
2.https://www.hrblock.com/tax-center/income/retirement-income/reporting-roth-ira-contributions/