Here’s how to find out how much your Social Security will be taxed
The promise when Social Security benefits were first passed in 1935 was that this income would not be taxable income for retirees. And it wasn’t… for 47 years… until 1984… and that changed.
This is NOT a political site, so before everyone starts pointing fingers, just know that the overwhelmingly bi-partisan passage of the 1983 amendments allowing these benefits to be taxed meant that for the last 40 years… Social Security Income is taxable.
Taxable Percentage Myth
The biggest mistake people make when they learn that Social Security income is taxable is they latch onto four taxable percentages:
0%
35%
50%
85%
The mistake lies in thinking that their Social Security will be taxed at one of these four percentages.
This is not correct.
But, you will see where those numbers come from as we go through how the taxable percentage is calculated. Just know that you could have 0% of your Social Security income be taxable. You could also have 1%, or 2%, or any percent up to 85% of your Social Security income be taxable.
Taxable does not mean Tax
We need to clarify something so this all make sense moving forward.
Percent Taxable DOES NOT mean that the percentage amount in dollars is taken away from you.
Percent Taxable means that percentage of your Social Security dollars that are taxable is now counted towards your overall income that is subject to taxes at your marginal tax rate.
So, if you get $20,000 per year in Social Security benefits and end up in the 85% taxable scenario (85% x $20,000 = $17,000) that does NOT mean that $17,000 are taken away from you and you are left with $3,000.
It means that $17,000 count towards your overall taxable income, and then THAT $17,000 will be taxed at whichever marginal tax brackets you fall into rather than having your full $20,000 of Social Security income showing up in your overall taxable income.
$3,000 in this scenario is yours and disappears from the amount of income you need to report.
Calculate your taxable percentage
We have a free Social Security Taxability Worksheet that you can download here.
We highly recommend having that up as we go through this, as it’ll help make everything we talk about moving forward a whole lot easier.
Provisional Income
A major definition we have to understand and calculate is Provisional Income. Your Provisional income will determine how much of your Social Security income is taxable.
Provisional income is made up of 3 buckets.
- Adjusted Gross Income
Adjusted gross income includes wages, dividends, capital gains, business income, and retirement distributions from things like a pension, 401(k), 403(b), and any Traditional IRAs you may have.So ALL of your Adjusted Gross Income goes into bucket 1 on the worksheet. - Tax-Exempt Interest Income
Think of this as municipal bonds.Roth account dollars DO NOT go into this bucket.In fact, Roth dollars do not show up anywhere in this exercise because you already paid taxes on Roth contributions and the promise with Roth accounts is that they won’t be taxed again…
Let’s hope they keep that promise this time.All of your tax-exempt interest income does go into the Tax-Exempt Interest Income bucket on the worksheet. - Social Security Income
Your annual Social Security income will go into bucket number 3 on the worksheet, but only 50% of your Social Security income is counted toward your Provisional Income number. NOT 100% of your Social Security income.
Two Tax Calculations
Adding all three buckets together gets you to your provision income number, and now THAT is what is used to run through 2 separate calculations. The amount of your Social Security subject to tax will be whichever of these two calculation ends up being LOWER.
Calculation 1 – Thresholds
The first path your Provision income can take involves two thresholds.
For single filers, the first threshold is $25,000 and the 2nd threshold is $34,000.
For joint filers, the first threshold is 32,000 and the 2nd threshold is $44,000.
Want to get even more upset about all of this?
Those thresholds haven’t changed since they were first instituted in 1984.
They haven’t been adjusted for inflation in 40 years!
At just a 3% annual inflation, that first single threshold of $25,000 would start at $84,500, and the first for joint filers would be almost $111,000! We don’t like this, but they don’t care what we think.
And this article is not about what ifs… it is about what is.
Let’s look at our calculations. I’m going to use joint filers for all of the examples, but you can download this spreadsheet and play with your own numbers.
If your joint provisional income number is higher than the 1st threshold of $32,000, then 50% of every dollar over the 1st threshold become taxable.
Additionally, 35% of any dollar over the 2nd threshold of $44,000 is also taxable.
Adding the threshold 1 number to the threshold 2 number gives you a dollar amount of your social security income that is taxable.
OR… We look at calculation number 2.
Calculation 2 – Straight 85%
Calculation number 2 is much more straightforward and it is just 85% of your total Social Security income. The full amount… not that 50% used in Provisional Income.
Remember how we said that up to 85% of your Social Security benefit may be taxed?
That’s why calculation 2 exists.
The calculation is just 85% of your Social Security Benefit and that is the maximum taxable amount… at the moment.
You will see that there are instances where 85%, meaning calculation 2, is actually lower than calculation 1, and therefore, 85% would be used.
Okay, let’s play with some numbers to see what our Provisional income would be and then run them through these calculations.
Example 1 – Social Security is your only income
Today (2024) the average social security check is right around $1700 per person, per month.
We’re going to use $2,000 per month for easy math.
Let’s pretend you and a spouse both bring in that amount for a total of $4,000 a month or $48,000 per year.
Your Provisional Income is made up of $0 from the Adjusted Gross Income bucket 1, because you aren’t taking any other income. Plus $0 from bucket 2 because you don’t have any tax exempt income, plus 50% of your Social Security income, so $24,000 in this case.
Now, let’s send that through our two calculations.
Well, the first one is easy because $24,000 does not meet either of the thresholds, so that amount is $0.
The second calculation is 85% of your total Social Security benefit of $48,000, which ends up being $40,800.
But remember, you will be taxed on the lower of the two calculations, which in this case is Calculation 1 of $0.
0% of your Social Security income will be taxed.
Example 2 – Social Security plus some extra income
We’ll keep your Social Security income at the same $48,000, but this time, you have some income from retirement sources. Let’s say that you take another $1,000 a month from your 401k – so $12,000 per year – and you take $100 a month, or $1200 per year from your municipal bond, tax exempt interest income.
Your Provision Income number is:
$24,000 from your AGI Bucket number 1…
plus $1,200 from your tax exempt income bucket number 2…
plus 50% of your $48,000 joint Social Security benefit or $24,000.
Giving us a total of $37,200 as the provision income number to run through our calculations.
$37,200 exceeds that first threshold of $32,000 by $5,200, but it doesn’t exceed the 2nd threshold of $44,000.
So take that $5,200 of money above threshold 1, multiply it by 50%, and that gives us $2,600 as the taxable amount of Social Security using Calculation 1.
That is 5% of your Social Security income, which is less than the 85% of Calculation 2, so we use the Calculation 1 amount.
To repeat what we mentioned at the beginning of the article, this $2,600 number is not the dollars taken away from your Social Security income. It is the amount of money taxable at whatever your marginal tax bracket would be.
Only $2,600 of your Social Security income is added to your Adjusted Gross Income rather than the full $48,000 of Social Security income. That AGI is the number you’ll use to run through the marginal tax brackets to calculate your total Federal tax.
Okay, let’s do one more example with higher income earners to see how things change.
Example 3 – Social Security plus some lots of income
In this last scenario, let’s keep the Social Security benefit at $48,000 for the couple, but they take $60,000 out of retirement accounts over the course of the year and add another $10,000 in tax exempt income.
Your Provision Income number is:
$60,000 from your AGI Bucket number 1…
plus $10,000 from your tax exempt income bucket number 2…
plus 50% of your $48,000 joint social security benefit or $24,000 giving a total of $94,000 as the provision income number to run through our calculations.
$94,000 is higher than both of the Calculation 1 thresholds, so we can finally see that number.
$94,000 is $62,000 higher than the $32,000 of Threshold 1, meaning we take 50% of $62,000 and that becomes threshold box #1 – $31,000.
$94,000 is $50,000 higher than Threshold 2 of $44,000, meaning we take 35% of the $50,000 excess and put it in threshold box #2 – $17,500.
Add box 1 and box 2 together and we get $48,500 in taxable Social Security income.
But wait a minute… that number is higher than our total Social Security benefit of $48,000…
That means that we will take Calculation #2, which is 85% of our Social Security income, because 85% is lower than 101%.
85% of $48,000 is $40,800 which will show up in your Adjusted Gross Income number for Federal taxes.
Myth Busted
We have now seen a scenario where 0% of your Social Security is taxable, 5% of your Social Security income is taxable, and 85% of your Social Security income is taxable.
You can see where the myth of standard percentages of 0%, 35%, 50%, and 85% come from, but now you also know that is a myth and not the reality.
State Taxes
Please note that these are Federal taxes.
There are 9 states that also tax Social Security income in different ways.
The 9 states are:
Colorado
Connecticut
Kansas
Minnesota
Montana
New Mexico
Rhode Island
Utah
Vermont.
Each state has its own rules around this.
Dive even deeper
Knowing what your percent taxable is great, but there are even more important financial conversations around how to use this number to avoid things like the Tax Torpedo.
We have a discussion on the other part of this worksheet in this video here:
Avoid the Social Security Tax Torpedo
