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As of the start of September, nearly 54 million Americans received Social Security retirement benefits. For many, Social Security is their main retirement income source, making it one of the country’s most important and effective social programs.
There are a lot of valid critiques of Social Security, but it should be easy to appreciate the financial lifeline it provides for millions.
Unfortunately, like other forms of income, Social Security benefits are subject to tax rules. However, there’s good and bad news for retirees. Let’s take a look at both.
Image source: Getty Images.
Most retirees can avoid Social Security state taxes
The good news about Social Security taxes is that most states do not tax Social Security benefits. Here are the 41 states (and Washington, D.C.) that currently do not:
- 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
States’ Social Security tax rules are fluid, so if you’re living in one of the nine states that currently tax benefits, be sure to keep up with your state’s rules each year because they can change. In 2024 alone, three states (Missouri, Nebraska, and Kansas) did away with their Social Security tax.
Unfortunately, federal tax rules still apply
Now, it’s time for me to be the bearer of bad news: Regardless of your state’s specific tax rules, federal tax rules still apply to everyone. The IRS uses your “combined income” to calculate your tax bill. It includes the following:
- Adjusted gross income (AGI): Your total income from all non-Social Security sources.
- Nontaxable interest: Interest income not subject to federal tax, such as U.S. Treasury and municipal bonds.
- Half of your Social Security benefits: 50% of your total Social Security benefits for the current year.
Once your combined income is calculated, Social Security uses the following rules to decide how much of your benefits are eligible to be taxed.
| Percentage of Taxable Benefits Added to Income | 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 |
Data source: Social Security Administration.
Seeing federal Social Security taxes in action
Federal Social Security tax rules are not as straightforward as I’m sure most people would prefer (surprise, surprise), so let’s walk through how they work.
At first glance, some people view the above table and think their Social Security benefits will be taxed up to 85%. Luckily, that’s not how it works. Those percentages are not how much Social Security will be taxed — just how much is eligible to be taxed.
Let’s imagine you’re married and filing jointly, and the following are true:
- You and your spouse’s AGI is $36,000
- You earned $1,000 in Treasury bond interest
- Your Social Security benefits for the year add up to $24,000
In this situation, your combined income would be $49,000 ($36,000 + $1,000 + $12,000). This means up to 85% of your benefits for the year ($20,400) are eligible to be taxed.
Social Security would take the $20,400, add it to any other income you have, and then tax it at your regular income tax rate. If you’re in the 22% tax bracket, you’d owe $4,488 on the $24,000 you received in benefits that year. This outcome is much better than owing $20,400.
The more you understand how Social Security taxes work, the better you can plan your retirement finances.
The $22,924 Social Security bonus most retirees completely overlook
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