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Wait . . . I'll owe taxes on Social Security income?

March 13, 2017

You're all revved up to retire from your job, and your co-workers have planned you a surprise retirement party. But did you know that a big surprise for many retirees is that their Social Security benefits and retirement investments are subject to taxes?

If you're working part-time or withdrawing from your investments, taxes are just one of the reasons you should consider waiting to collect Social Security. And keep in mind that some states tax Social Security income as well.

See more on how delaying benefits can boost your Social Security income »

Federal taxes on Social Security

Whether you'll owe taxes on your Social Security income is determined by the provisional income formula:

Provisional income (PI) = adjusted gross income (AGI) + tax-exempt bond interest + 50% of your Social Security benefits.

If your PI for the year is above these thresholds, some of your benefits may be taxable.

 

Provisional income threshold

% of taxable benefits

Single

$0 to $25,000

0%

> $25,000

Up to 50%

> $34,000

Up to 85%

Married, filing jointly

$0 to $32,000

0%

> $32,000

Up to 50%

> $44,000

Up to 85%

Married, filing separately*

> $0

Up to 85%

*This applies if your tax status is "married, filing separately" and you lived with your spouse at any time during the tax year.

The amount of Social Security income that's taxable is the smallest of the following three calculations:

1. 85% of Social Security benefits.

2. 50% of Social Security benefits + 85% of PI over $34,000 (single) or $44,000 (married, filing jointly.

3. 50% of PI over $25,000 (single) or $32,000 (married, filing jointly) + 35% of PI over $34,000 (single) or $44,000 (married, filing jointly).

Does my state tax Social Security?

Most states don't tax Social Security benefits. But the ones that do either follow the same federal PI rules, or they have special rules and income thresholds to determine what's taxable.

These four states use the federal PI formula: Minnesota, North Dakota, Vermont, and West Virginia. The taxable portion of Social Security for these states is the same as the federal amount.

The nine states listed in the chart below have special rules and income thresholds. Most use the feeral AGI formula rather than the federal PI formula for taxing Social Security income.


States with special rules for taxing Social Security

If your AGI or income is above the thresholds for your state and filing status, a portion of your Social Security benefits may be taxed.

Colorado

Income > $20,000 (under age 65)
Income > $24,000 (age 65 or over)

Income above includes Social Security and distributions from IRAs, pensions, and annuities. In Colorado, this income threshold applies to each married, filing jointly spouse.

Connecticut

AGI > $50,000 (single)
AGI > $60,000 (married, filing jointly)

Kansas

AGI > $75,000 (all filing statuses)

Missouri

AGI > $85,000 (single)
AGI > $100,000 (married, filing jointly)

Montana

Income > $25,000 (single)
Income > $32,000 (married, filing jointly)
Income > $16,000 (married, filing separately)

Montana uses Worksheet VIII instead of the federal AGI.

Nebraska

AGI > $43,000 (single; married, filing separately)
AGI > $58,000 (married, filing jointly)

New Mexico

$8,000 income exclusion if age 65 or over and if AGI is under $28,500 (single) or AGI under $51,000 (married, filing jointly)

Rhode Island

AGI > $80,000 (single)
AGI > $100,000 (married, filing jointly)

These income threshholds begin with the 2016 tax year.

Utah

Tax credit rather than a deduction up to $450 (single) or $900 (married) if age 65 or over.
Tax credit up to $288 if under age 65 (subject to income limits).

Utah uses the federal PI formula plus state-specific additions to income. Residents under age 65 may also receive a tax credit under different rules.

If you live in a state that counts Social Security benefits as taxable income, you should consult your state tax department for details and a qualified tax advisor.

Will delaying Social Security affect my taxes?

Your Social Security benefit increases the longer you wait to begin taking it, up to age 70. For many people, especially those who rely on Social Security more than investment income, delaying benefits could help lessen their tax burden. But for those at higher income levels—where up to 85% of Social Security is taxed—delaying benefits may not impact the taxability of their Social Security benefits, although it's a factor in tax planning when coordinated with other retirement resources.

Although it's important to take taxes into consideration, that shouldn't be the only factor when deciding when to start taking Social Security. When it comes to your retirement income strategy, you should also take into account your overall income level, whether you plan to leave survivor benefits to a spouse, the tax status of the types of accounts or investments you hold, your health outlook, and any plans you may have for leaving an inheritance to your beneficiaries.

Everyone's tax situation is unique, so it's best to consult a professional tax advisor before making tax decisions.

Key things to remember

  • Consider the taxes you'll owe on your Social Security benefits when working out a strategy for retirement income.
  • Federal taxes on Social Security can be withheld in advance. You'd need to estimate your income to calculate an accurate withholding amount.
  • Some states tax Social Security benefits, but that doesn't necessarily mean you should move or choose another state to retire in. Look at the big picture, including the state's overall taxes and the cost-of-living expenses.
  • Developing a sound tax strategy can be difficult to do without professional help, so we recommend consulting a tax advisor.

View our infographic on this topic »

Notes:

  • All investing is subject to risk, including the possible loss of the money you invest.
  • This information is not a substitute for that provided by the Social Security Administration.
  • We recommend that you consult a tax or financial advisor about your individual situation.
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