Are Social Security Benefits Taxable?

June 02, 2020
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The answer is typically, yes. If you’re looking for specifics, skip to the bottom. If you’re like me and want to know why, read on.

 

The Social Security Act was made into law in 1935 under the Roosevelt administration. During that time and for a long period after, Social Security was not taxed.

 

In 1983, Congress passed amendments that allowed for up to 50% of the benefit to be taxed. The rationale was that beneficiaries had not contributed 100% of their benefit into Social Security, so it should not be entirely tax-free.

 

In 1993, they changed that threshold to allow up to 85% of Social Security benefits to be taxable. The reason for 85%? It was calculated the average beneficiary contributed 15% of their benefit amount over their lifetime, thus up to 85% should be eligible for taxes.[1]

 

Federal Taxation

 

  • Combined income of $32,000-$44,000 ($25,000-$34,000 if single): Up to 50% taxable
  • Combined income over $44,000 ($34,000 if single): Up to 85% taxable
  • Combined income below $32,000 ($25,000 if single): Generally tax-free

 

Combined income = Adjusted gross income + nontaxable interest + ½ Social Security Benefit[2]

 

Example – If you are taxed at 22% rates and 60% is subject to taxes, A $2,000 benefit, would result in $264 in taxes ($2,000 X 60% = $1,200 X 22% taxes = $264).

 

State Taxation

 

Colorado, Connecticut, Kansas, Minnesota, Missouri, Montana, Nebraska, New Mexico, North Dakota, Rhode Island, Utah, Vermont and West Virginia collect state income tax on Social Security payments to at least some beneficiaries.[3]

 

Disclaimer: Alex Voorhees and Reston Wealth Management do not provide legal, accounting or tax advice. This information is not intended to be a substitute for specific individualized financial, tax or legal advice. We suggest that you discuss your specific situation with a qualified tax or legal advisor. Every individual situation is unique and a proper plan should be put in place before making a decision regarding Social Security. The Social Security Administration alone makes all final determinations on your eligibility for benefits and the benefit amounts.  You should consult with your local Social Security Office before acting upon any information provided. The opinions voiced in this article are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. No strategy assures success or protects against loss.

[1] DeWitt, Larry. “Social Security.” Social Security History, SSA Historian's Office, Feb. 2001, www.ssa.gov/history/taxationofbenefits.html.

[2] “Social Security.” Benefits Planner | Income Taxes And Your Social Security Benefit | Social Security Administration, www.ssa.gov/planners/taxes.html.

[3] AARP. “The 13 States That Tax Your Social Security Benefits.”, 9 Apr. 2019, www.aarp.org/retirement/social-security/questions-answers/which-states-do-not-tax-social-security-benefits/.