Social Security is a key source of retirement income for most Americans, one you paid for with years of taxes. Since it's a government benefit, it may seem like it should be tax-free, but that isn't always the case. Here are the rules for determining when is Social Security taxable along with how to file.
Is Social Security Taxable at the Federal Level?
Whether you owe taxes on Social Security at the federal level depends on how much you're receiving from other sources. The IRS looks at something called your "combined income." This adds up your adjusted gross income plus any nontaxable interest earnings (like from tax-free municipal bonds) plus half of your Social Security Income. Your adjusted gross income is your taxable income from other sources like investments, 401k withdrawals and part-time work in retirement, minus certain deductions.
As of 2021, the IRS starts taxing your Social Security payments if you're single and your combined income is at least $25,000, or if you're married and your joint combined income is at least $32,000. If your combined income is below these limits, then you'll receive Social Security tax-free.
How Much Is Social Security Taxed?
The IRS doesn't tax all your Social Security payments. No matter how much combined income you have from other sources, you'll receive at least part of your Social Security tax-free. The amount that's taxable once again depends on how much you earn.
If you're single and have combined income between $25,000 to $34,000 or are married and have joint combined income between $32,000 to $44,000, you could owe tax on up to 50% of your Social Security payments.
If you are single and have combined income over $34,000 or are married and have joint combined income over $44,000, you could owe tax on up to 85% of your Social Security payments. The IRS offers a worksheet to help you calculate how much you would owe manually, or tax software could handle it for you.
Is Social Security Taxable at the State Level?
Thirteen states tax Social Security payments: Colorado, Connecticut, Kansas, Minnesota, Missouri, Montana, Nebraska, New Mexico, North Dakota, Rhode Island, Utah, Vermont and West Virginia. If you don't live in one of these 13 states, your Social Security payments will not be taxed at the state level. (If you're looking for a tax-friendly state to retire in, these are the best options.)
The exact rules depend on the state. Some follow the same system as Social Security, using the same calculation based on combined income. Others have their own rules. The income tax rate for your benefits also depends on where you live. To see what you would owe, check with your state's department of revenue.
How Do You File Your Tax Return for Social Security Income?
To report and file the taxes on your Social Security income, you use Form 1040 for your federal income tax return. This is the form where you list all your sources of income. On line 6a, you write down your total Social Security income for the year, and on 6b, you list the amount that is taxable (using the previous worksheet calculation).
You would follow a similar process using the tax returns for your state if it charges tax on Social Security. If you use tax software, it will take care of these calculations and prepare your return.
When you owe taxes on Social Security, you're supposed to send them to the IRS throughout the year, not just all at once with your tax return. You can manually send in quarterly payments, but an easier option is to set up withholding with the Social Security Administration. You can do this when you first enroll in Social Security or later on using IRS Form W-4V. Then, they will automatically take what you owe out of your Social Security check and send it to the IRS.
Consider meeting with a tax professional for more help navigating taxes in retirement, especially if you're setting things up with Social Security the first time.