At the beginning of September, approximately 54 million Americans were receiving Social Security retirement benefits. For numerous individuals, this program serves as their primary source of income during retirement, which underscores its significance and effectiveness as one of the nation’s key social initiatives.
Many legitimate criticisms can be made about this topic.
Social Security
, yet it should be simple to recognize the crucial financial support it offers to millions.
Learn More: Claim as much as $845 in cashback this year simply by altering your payment method at Costco!
Learn more here.
Unfortunately, similar to various types of earnings,
Social Security benefits
Are governed by tax regulations. Nevertheless, there is positive and negative information for those who have retired. Let’s examine each of these points.
Many retired individuals can evade state taxation on their Social Security benefits.
The positive aspect of Social Security taxes is that many states do not levy taxes on Social Security benefits. Below are the 41 states (along with Washington, D.C.) where this applies:
- Alabama
- Alaska
- Arizona
- Arkansas
- California
- Delaware
- Florida
- Georgia
- Hawaii
- Idaho
- Illinois
- Indiana
- Iowa
- Kansas
- Kentucky
- Louisiana
- Maine
- Maryland
- Massachusetts
- Michigan
- Mississippi
- Missouri
- Nebraska
- Nevada
- New Hampshire
- New Jersey
- New York
- North Carolina
- North Dakota
- Ohio
- Oklahoma
- Oregon
- Pennsylvania
- South Carolina
- South Dakota
- Tennessee
- Texas
- Virginia
- Washington
- Wisconsin
- Wyoming
The regulations surrounding Social Security taxes at the state level are subject to change, so if you reside in one of the nine states where these benefits are presently taxed, make certain to stay updated on your state’s policies every year as they might vary. For instance, in 2024, Missouri, Nebraska, and Kansas eliminated their taxation on Social Security.
Sadly, the regulations for federal taxes still need to be followed.
Now, I must deliver some unfortunate information: Despite your state’s particular tax regulations, federal tax laws remain applicable to all individuals. The IRS takes into account your “total income” when determining your tax liability. This total encompasses the following elements:
-
Adjusted gross income (AGI)
Your combined earnings from every source except Social Security. -
Nontaxable interest
Interest income exempt from federal taxation, like
U.S. Treasury
and municipal bonds. -
Fifty percent of your Social Security benefits
: 50% of your aggregate Social Security benefits for the present year.
After your total income is determined by combining incomes, Social Security applies these guidelines to ascertain which portion of your benefits can be subject to taxation.
|
Portion of Taxable Benefits Incorporated into Earnings |
Filing Single |
Married, Filing Jointly |
|---|---|---|
| 0% | Less than $25,000 | Less than $32,000 |
| Up to 50% | $25,000 to $34,000 | $32,000 to $44,000 |
| Up to 85% | More than $34,000 | More than $44,000 |
Source of data: Social Security Administration.
Observing U.S. Federal Social Security taxes in effect
The regulations surrounding Federal Social Security taxes may not be as simple as many individuals likely wish (typical scenario, right?), so allow me to explain their functioning step-by-step.
Initially, many individuals looking at the aforementioned table believe that their Social Security benefits could face taxation of up to 85%. Fortunately, this understanding is incorrect. These percentages do not indicate the amount of Social Security subject to tax; they merely show the portion that can be taxable.
eligible
to be taxed.
Imagine you’re married and filing your taxes jointly, with the following conditions:
-
You and
your spouse’s
AGI is $36,000 - You earned $1,000 from Treasury bond interest.
- The total amount of your Social Security benefits for this year amounts to $24,000.
In this scenario, your total income adds up to $49,000 ($36,000 + $1,000 + $12,000). Consequently, as much as 85% of your yearly benefits, which amounts to $20,400, could potentially be subject to taxation.
Social Security will add the $20,400 to any additional income you earn and subsequently tax it at your usual income tax rate. Should you fall into the 22% bracket,
tax bracket
, you would owe $4,488 for the $24,000 in benefits you received that year. This result is far more favorable than owing $20,400.
The deeper your understanding of how Social Security taxes function, the more effectively you can strategize your retirement funds.
The $
22,924
The Social Security benefit many seniors fail to notice.
If you’re similar to many Americans, you might be lagging several years—or even more—behind on saving for retirement. However, some lesser-known “ Social Security tips” may assist in increasing your retirement earnings. For instance: one simple strategy could net you an additional $
22,924
More every year! After mastering strategies to optimize your Social Security benefits, we believe you can retire with confidence and achieve the peace of mind everyone seeks.
Just click here to find out how you can learn more about these tactics.
Check out the “Social Security secrets” »
The Motley Fool has a
disclosure policy
.
