Income Tax On Social Security Benefits

As we approach April 15, let’s discuss the federal taxation of your Social Security benefits. The Social Security Administration estimates that 40% of recipients pay income tax on their benefits. The taxable benefits include retirement and spousal, survivor, and disability (SSDI) benefits. Keep in mind that if you have a child receiving benefits under their own Social Security number, they also may be subject to income tax. Benefits received under Supplemental Security Income (SSI) are not taxable.

Back in 1984, Social Security benefits became subject to income tax. Benefits received were made taxable in order to raise revenue in an effort to not cut benefits to people who were already receiving benefits. The major impetus for these many changes was to ensure Social Security’s solvency. We are quickly approaching the same solvency issue in 2034.

In 1984, the income thresholds were designed to make Social Security taxable for high earners. The income threshold for single people was $25,000 and $32,000 for married couples filing jointly. The taxable amount was 50% of benefits received.

In 1993, Congress added a second level of taxability. The income threshold for single people was $34,000 and $44,000 for married couples filing jointly. The taxable amount can be as high as 85% of benefits received. Here’s the rub, these income thresholds have never been adjusted for inflation. This means that over the last 39 years as incomes have increased, more people have become subject to the income tax. The taxable amount is taxed at ordinary income tax rates.

To determine if your Social Security benefits are taxable you need to determine your “provisional” income or MAGI (Modified Adjusted Gross Income). Start with Adjusted Gross Income (Line 11-IRS Form 1040) add non-taxable interest (Line 2a-IRS Form 1040) and add 50% of your total Social Security benefits. If this amount exceeds the thresholds mentioned above, you have taxable Social Security benefits. Here is a link to the IRS website to help you calculate the taxable amount. Click on the “Begin” button and follow the instructions.

If you find that your Social Security benefits are taxable, you can voluntarily have Social Security withhold federal income tax by filing IRS Form W-4V. You may have 7%,10%,12% or 22% withheld.

As far as state income tax is concerned, most states do not tax your Social Security benefits. There are 12 states that tax Social Security benefits. They are Colorado, Connecticut, Kansas, Minnesota, Missouri, Montana, Nebraska, New Mexico, Rhode Island, Utah, Vermont, and West Virginia. Beginning in 2024, Missouri and Nebraska will stop taxing Social Security benefits. If you live in Missouri or Nebraska and you have withholding on your Social Security benefits, or are making estimated payment, you will want to adjust these amounts for 2024.

Unfortunately, taxation of your Social Security benefits is not going anywhere. It will be interesting to see what changes will be made by the Social Security Board of Trustees to keep monthly benefits the same. They have until 2034 to make these adjustments. Do not be surprised if 100% of benefits become taxable.