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Are Social Security Payments Taxable?

Published April 6, 2021

5 minute read

Devon Taylor

By Devon Taylor

Is social security disability taxable? It’s a question that a lot of people have asked. While the answer can be a bit complicated, in most instances Social Security benefits of any kind are subject to being taxed. Most Americans who receive Social Security benefits pay income tax on up to half (or even 85%) of that money. This is because, for most people, Social Security is only one source of their income in retirement. The combined income from Social Security and other sources usually pushes them above the very low bar to avoid paying any income tax at all.

However, there are ways to lower the amount of taxes you might own on Social Security benefits. Steps can be taken both before and during retirement to limit the tax hit on Social Security income. In this article, we explore Social Security benefits. We will explain how they work and how they are taxed by the U.S. government.

How Social Security Is Taxed

Social Security payments have been taxed above certain income thresholds since 1983. However, it’s important to know that nobody has all their Social Security benefits taxed. The top-level is 85% of the total benefit. (Not to be confused with an 85% rate rate. Just that up to 85% of Social Security could be taxed.) What percentage a person is taxed at depends on their total income for the year. Here’s an excellent breakdown of how tax brackets work. Total income can include a combination of wages, self-employed earnings, interest, dividends, capital gains, and any other sources of income that materially benefits you. The IRS has a rather complex formula for determining how much tax you should pay on your Social Security payments.

For example, those with an income above $25,000 (or $32,000 for a couple) pay tax on up to 50% of the benefits they receive. Meanwhile, those with an income of more than $34,000 (or $44,000 for a couple) have up to 85% of their benefits taxed. Married couples who file a joint return have their Social Security benefits taxed as if they have one combined income.

Spousal, Survivor, Disability, and Supplemental Security Income Benefits

These programs all follow the same general rules as the Social Security program for retirees. There’s one main exception, though. Supplemental Security Income (SSI) is not a Social Security program. It’s a separate program for those who are in financial need or disabled. As such, those payments are not taxed in any way.

Spousal Benefits

The rules for the spousal benefit are the same as for all other Social Security recipients. If your income is above $25,000, you will owe taxes on up to 50% of the benefit amount. The percentage rises to 85% if your income is above $34,000.

Survivor Benefits

Survivor benefits paid to children are rarely taxed, since very few children have other income that reaches the taxable ranges. The parents or guardians who receive the benefits on behalf of the children are not required to report the benefits as income either.

Disability Benefits

Social Security disability benefits follow the same rules on taxation as the Social Security retiree program. That is, benefits are taxable if the recipient’s gross income is above a certain level. The current threshold is $25,000 for an individual or $32,000 for a couple. So yes, to answer the question this article started off on: social security disability benefits are subject to taxes.

How To Pay Social Security Taxes

The IRS sends statements every January, detailing the Social Security benefits you received during the previous year. The information is also available online at the official Social Security website. Taxes owed on Social Security benefits can be paid in multiple ways. You can pay up on a quarterly basis, once a year when you file your tax return, or the IRS can have federal taxes withheld from payouts at the source before they are issued. That last one will feel similar to having your estimated taxes taken out of your paycheck, back in your working days.

State Taxes

In addition to the federal taxes on Social Security, the following 13 states also levy some form of tax on Social Security income: Colorado, Connecticut, Kansas, Minnesota, Missouri, Montana, Nebraska, New Mexico, North Dakota, Rhode Island, Utah, Vermont and West Virginia. Check with the state tax agency where you live to determine how Social Security is (or isn’t) taxed. You don’t want to neglect paying your appropriate state taxes and ending up with an unexpected bill.

Non-Taxable Social Security

You won’t owe federal tax on any Social Security benefits if your total taxable income falls below the thresholds set by the IRS. Those who live in one of the 37 states that do not tax Social Security income can avoid paying taxes on these benefits at the state level.

Other ways to avoid (or limit) the taxes owed on Social Security is to keep some retirement income in Roth accounts. Contributions to a Roth IRA or Roth 401(k) are made with after-tax dollars. This means that they are not subject to tax when the funds are withdrawn. Another strategy is to withdraw taxable income before retirement. In this case, you can maximize your taxable income in the years before you begin to draw Social Security benefits. In effect, you will be paying taxes owed early, before you retire and begin receiving Social Security payments. There are numerous other ways you can use tax credits and deductions to reduce your taxable income.

The Bottom Line

Social Security benefits are almost always taxed by the IRS. Only those experiencing financial hardship or in the lowest tax bracket are likely to avoid paying. For most people, Social Security income is just one source of retirement revenue. When it’s added to pension funds or other investments, the total annual income becomes high enough to be subject to taxation.

As we mentioned, most U.S. states do not tax Social Security benefits. However, an unlucky 13 states do levy an additional tax on this retirement income. That can constitute a double whammy for people living there. While there are a few strategies for minimizing the taxes owed on Social Security income, they typically only help limit the amount of tax owing. Avoiding Social Security taxes altogether is not really feasible for most Americans. When in doubt, be sure to consult a tax expert in your area. They will be able to guide you on exactly how much of your Social Security you get to keep.

Social Security Taxes

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Devon Taylor

Managing Editor

Devon is an experienced writer and a father of three young children. He's simultaneously trying to build college funds and plan for an eventual retirement. He's been in online publishing since 2013 and has a degree from the University of Guelph. In his free time, he loves fanatically following the Blue Jays and Toronto FC, camping with his family, and playing video games.

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