How Are Social Security Benefits Taxed?

This blog has traditionally focused on early retirement. As such, we haven’t given Social Security the attention it probably deserves.

Social Security benefits are crucial for most retirees. Even for early retirees with sizable portfolios, Social Security benefits can provide a substantial and important portion of retirement income.

In the past we’ve explored how retiring early impacts Social Security benefits and when to claim Social Security benefits. 

An important aspect that we haven’t addressed is the taxation of Social Security benefits. You need to understand how much of your stated benefit you will actually receive after taxes to effectively plan retirement income.

This will be instructive to many readers who have strong opinions one way or the other about the future of Social Security. The policy of this blog has always been to avoid speculation about what may happen in the future. 

However, you don’t have to speculate to understand how Social Security is taxed. You will see that taxes on this benefit are already effectively increasing every year. As a result, after-tax benefits are already getting smaller for many people….

How Is Social Security Taxed?

Social Security benefits are taxed the same whether they are retirement, survivor, or disability benefits. Those with the lowest incomes do not have their Social Security benefit taxed at all.

As income increases above a defined threshold, 50% of your benefit becomes taxable. Those with the highest income are required to pay tax on 85% of their Social Security benefits. The thresholds are dependent on your filing status.

Benefits are not taxable if total provisional income is less than $32,000 for those married filing jointly. 50% of benefits are taxable if income is over $32,000 up to $44,000. If income is greater than $44,000, then 85% of your Social Security benefits are taxable.

Benefits are not taxable if total provisional income is less than $25,000 for those using the single filing status. 50% of benefits are taxable if income is between $25,000 and $34,000. If income is greater than $34,000, 85% of your Social Security benefits are taxable.

The taxation of Social Security benefits is not favorable for those utilizing the married filing single status. 85% of benefits are taxable regardless of income.

Unless you have a compelling reason to use the married filing single status, it is important to understand what counts as provisional income for the purposes of determining Social Security taxation.

What is Provisional Income?

Provisional income determines how much of your Social Security is taxed. Calculate provisional income by adding three components:

Adjusted Gross Income (excluding Social Security benefits) + Tax-exempt income + 50% of Social Security benefits received.

That is simple enough. But it is important to understand a bit of the history of Social Security taxation. 

Understand how and when these thresholds were developed. This illustrates why more of us will be pushed above the thresholds over time, decreasing our actual after-tax benefit.

A Brief History of Social Security Tax

Social Security began in 1935. Since that time it has undergone many changes. One of the most significant was the taxation of benefits. 

Find a detailed history of the taxation of Social Security from the SSA website here. My abbreviated history will provide the key pieces of information you need to better understand your benefits.

From Social Security’s inception until 1983, Social Security benefits were not taxed. A 1983 law made up to 50% of Social Security benefits taxable if income exceeded certain thresholds. 

The 1983 law set the thresholds at $25,000 for single filers and $32,000 for married filers. If those numbers look familiar, they are the same lower thresholds that are still in place today, four decades later.

In 1993, further changes to the law made up to 85% of Social Securities benefits taxable. That 1993 law set the income threshold at $34,000 for single filers, and $44,000 for those that use the married filing jointly status. If those numbers look familiar, they too are the same thresholds that are in place today, three decades later.

The Hidden Annual Tax Increase on Social Security Benefits

There is a common feature of almost every aspect of our tax system. Numbers are adjusted, or at least considered for adjustment, annually for inflation. As an example, the contribution limits and income cutoffs for retirement accounts and key tax credits increased in response to high inflation in 2022. Standard deductions and tax brackets also increased substantially.

Social Security benefits likewise got a considerable bump, increasing 8.7% over 2022 amounts. But the threshold amounts that determine how much of your Social Security benefit is taxed have not changed. The lower and upper thresholds are exactly the same as they were four and three decades ago, respectively.

In essence, not adjusting these thresholds for inflation is a hidden annual tax increase on these important benefits. When benefits were first taxed in 1983, the law only impacted about 10% of recipients. Recent research estimates that over 50% of recipient’s now have their Social Security benefits taxed.

I would suspect that number will be close to 100% of the readership of this blog. As with all aspects of personal finance, it is important to understand the rules that apply to you and plan accordingly.

Related: Early Retirement Tax Planning 101

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[Chris Mamula used principles of traditional retirement planning, combined with creative lifestyle design, to retire from a career as a physical therapist at age 41. After poor experiences with the financial industry early in his professional life, he educated himself on investing and tax planning. Now he draws on his experience to write about wealth building, DIY investing, financial planning, early retirement, and lifestyle design at Can I Retire Yet? Chris has been featured on MarketWatch, Morningstar, U.S. News & World Report, and Business Insider. He is also the primary author of the book Choose FI: Your Blueprint to Financial Independence. You can reach him at chris@caniretireyet.com.]

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