Social Security benefits are a crucial source of retirement income for millions of Americans. For some, it’s the primary income in retirement, making this program a financial lifeline.
But the reality of Social Security income taxes may surprise many retirees. While there are some tax rules that apply to Social Security benefits, both at the federal and state levels, the good news is that many retirees won’t face state taxes on these benefits.
However, federal tax obligations can still impact Social Security income. Here’s a closer look at the rules and exceptions.
State Taxes
Most States Don’t Tax Social Security
The silver lining in Social Security taxation is that most states don’t tax these benefits. Currently, 41 states and Washington, D.C. allow retirees to receive their Social Security income tax-free at the state level. Here’s a list of the states that do not tax Social Security benefits:
| Non-Taxing States on Social Security Benefits |
|---|
| Alabama, Alaska, Arizona, Arkansas, California |
| Delaware, Florida, Georgia, Hawaii, Idaho |
| Illinois, Indiana, Iowa, Kansas, Kentucky |
| Louisiana, Maine, Maryland, Massachusetts |
| Michigan, Mississippi, Missouri, 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 |
Nine states, however, still tax Social Security benefits. Yet, these tax rules are subject to change. In 2024 alone, Missouri, Nebraska, and Kansas removed their Social Security tax, allowing residents to keep more of their retirement income. Retirees should keep up with state tax rules in case of updates.
States That Still Tax Social Security
In the remaining states, Social Security benefits may still be subject to state taxes. Often, this taxation depends on specific income thresholds. For those living in one of these states, staying informed about potential tax law changes each year is essential.
Federal Taxes
The Federal Tax Formula
While retirees in most states escape Social Security taxes at the state level, the IRS still requires federal taxes on Social Security benefits if income exceeds certain thresholds. This federal tax obligation is based on your “combined income,” which includes:
- Adjusted Gross Income (AGI): Total income from non-Social Security sources.
- Nontaxable Interest: Tax-exempt income from sources like municipal bonds.
- Half of Social Security Benefits: 50% of total annual Social Security income.
This “combined income” is what determines if any of your Social Security benefits are taxable—and if so, by how much.
Federal Tax Thresholds
Once combined income is calculated, the IRS applies the following thresholds:
| Filing Status | Combined Income Threshold | Percent of Benefits Taxable |
|---|---|---|
| Single, Head of Household, or Qualifying Widow(er) | $25,000 – $34,000 | Up to 50% |
| Single, Head of Household, or Qualifying Widow(er) | Over $34,000 | Up to 85% |
| Married Filing Jointly | $32,000 – $44,000 | Up to 50% |
| Married Filing Jointly | Over $44,000 | Up to 85% |
If your combined income exceeds these amounts, a portion of your Social Security benefits becomes taxable, but it doesn’t mean the benefits themselves are taxed at 50% or 85%. Only a percentage of benefits are eligible for tax, and that portion is then taxed according to your income bracket.
How Federal Taxation Works
Let’s walk through a real-world example to clarify how federal Social Security taxes apply.
Suppose you’re married and filing jointly with these details:
- AGI: $36,000
- Treasury Bond Interest: $1,000 (nontaxable interest)
- Social Security Benefits: $24,000 annually
Your combined income is $49,000 ($36,000 + $1,000 + $12,000). Since this exceeds the $44,000 threshold, up to 85% of your benefits, or $20,400, are taxable. At a 22% tax bracket, your tax on the Social Security benefits would be approximately $4,488, rather than $20,400—a significant difference from a straightforward percentage assumption.
Planning Your Social Security Tax Strategy
Understanding Social Security tax rules can help you strategize effectively. You might consider adjusting your income sources or exploring ways to reduce taxable income if your Social Security is partially taxable.
Many financial advisors recommend drawing from non-taxable sources, like Roth IRAs, to limit taxable income and minimize the tax burden on Social Security benefits.
In conclusion, Social Security benefits may be taxed, but whether you’ll owe taxes—and how much—depends largely on your total income and the state you live in. Most retirees can avoid state taxes on Social Security, while federal tax rules apply to those with higher incomes.
By learning how Social Security taxes work, you can make smarter financial decisions for retirement and potentially reduce the tax hit on your benefits.
