Social Security has three sources of funding. The biggest is the payroll taxes workers pay on their incomes each year, which brought in over $1.1 trillion in 2022, the most recent year data is available. The interest on invested trust fund asset reserves added another $66.4 billion in income. The remaining $48.6 billion — a mere 4% of Social Security’s total income — came from taxing the benefits of seniors whose income exceeded certain limits. But that figure is expected to be higher this tax season. Here’s why, and how much you might owe in benefit taxes.
Image source: Getty Images.
Understanding Federal Taxation of Social Security Benefits
The federal government began taxing the Social Security benefits of select seniors in 1984, and 10 years later it altered its taxation rules to bring even more revenue to the program. Today, beneficiaries can expect a portion of their benefits to be taxable if their provisional income exceeds specific thresholds based on their marital status.
|
Marital Status |
0% of Benefits Taxable |
Up to 50% of Benefits Taxable |
Up to 85% of Benefits Taxable |
|---|---|---|---|
|
Single |
Provisional incomes under $25,000 |
Provisional incomes between $25,000 and $34,000 |
Provisional incomes greater than $34,000 |
|
Married |
Provisional incomes under $32,000 |
Provisional incomes between $32,000 and $44,000 |
Provisional incomes greater than $44,000 |
Data source: Social Security Administration.
Even if you fall into the 85% taxable bracket, that doesn’t mean you’ll give 85% of your benefits back to Uncle Sam. It means you’ll pay ordinary income tax on 85% of your benefits, with income tax brackets ranging from 10% to 37%.
Inflation continues to drive up the cost of living. As a result, many seniors are encountering higher adjusted gross incomes (AGIs) and seeing their Social Security benefits trending upward over time, thanks in part to cost-of-living adjustments (COLAs) in most years.
State-Level Taxation of Social Security Benefits
Currently, 10 states also tax the Social Security benefits of some of their seniors. If you live in Missouri or Nebraska, you may have to pay benefit taxes when you file your 2023 returns. These states just suspended their benefit taxes at the start of 2024.
Not all seniors who reside in one of these states pay these taxes. Each state has its own formula for determining who owes them. It’s important to check your state’s tax regulations and consult with a tax professional to understand if you could owe these taxes.
Preparing for Social Security Benefit Taxes
If you run into Social Security benefit taxes, it could result in a smaller refund or possibly even a tax bill this year. Should you owe the IRS, you can set up a payment plan if you don’t have the cash to pay upfront. Consult a tax professional to decide upon the best approach. For future years, you might be able to reduce your odds of owing Social Security benefit taxes by reducing your spending or relying more upon Roth savings, which are funded with after-tax dollars, thereby not counting toward your taxable income for the year. You can also request that the government withhold money from your Social Security checks for taxes if you’d like, avoiding a surprise tax bill when filing your returns.
The $22,924 Social Security benefit most retirees completely overlook
If you’re like most Americans, you’re a few years behind on your retirement savings. But a handful of little-known “Social Security secrets” could help ensure a boost in your retirement income. For example, one easy trick could pay you as much as $22,924 more… each year!
View the “Social Security secrets”
The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
