42 States Don’t Levy Social Security Taxes, Yet as Much as 85% of Benefits May Still Be Taxed

Quick Read

• Even where Social Security is not taxed at the state level, federal rules can still tax as much as 85% of your benefits depending on provisional income.

• Single filers with provisional income above $34,000, or married couples filing jointly above $44,000, may have up to 85% of benefits taxed.

• Roth IRA contributions, Roth conversions, and tax-loss harvesting are among the strategies that can help reduce the overall tax burden.

Social Security is funded through payroll taxes on wages. Although there is a yearly wage cap, most workers still pay into the program from each paycheck.

That might make it seem as though retirement benefits should always arrive tax-free. In reality, that is not guaranteed.

While most states do not tax Social Security, eight do. And even in the 42 states without a state-level tax on benefits, federal taxes can still apply to as much as 85% of them under a long-standing rule.

When Social Security benefits are taxed

Payroll taxes provide most of Social Security’s funding, but taxes on benefits also help support the program.

Not every recipient owes federal tax on Social Security. Whether benefits are taxable depends on provisional income.

Provisional income includes adjusted gross income, tax-exempt interest, and 50% of annual Social Security benefits. If that total is below $25,000 for single filers or below $32,000 for married couples filing jointly, none of the benefits should be taxed.

Once those levels are exceeded, taxation can begin. Single filers with provisional income between $25,000 and $34,000, or joint filers between $32,000 and $44,000, may have up to 50% of their benefits taxed.

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When provisional income rises above those limits, as much as 85% of Social Security benefits can become taxable at the federal level. That does not mean 85% of your check disappears to taxes; it means that portion is included in taxable income and taxed at your ordinary rate.

For example, a single filer with $40,000 in provisional income and a $2,000 monthly benefit could have up to $1,700 of that benefit taxed. At a 22% tax rate, that could translate to as much as $374 a month in taxes tied to Social Security.

Ways to reduce the tax impact

If retirement income is relatively high, paying federal taxes on Social Security may be unavoidable. Even so, there are steps that can reduce your overall tax bill.

Holding some retirement savings in a Roth IRA is one way to limit taxes. If you are approaching retirement with money in a traditional retirement account, a Roth conversion may also help.

Tax-loss harvesting in a taxable brokerage account can reduce taxes as well, and careful use of deductions may help too.

Even with good planning, some people will still owe taxes on their Social Security benefits. That is not necessarily a mistake.

Often, it simply means income is high enough that a full exemption is not available. In that case, advance planning can make the tax hit easier to manage.

Learn 7 Ways To Generate Income With A $1,000,000+ Portfolio

If you have saved more than $1,000,000, this guide is designed for you. In retirement, the goal is not to run out of money, but to make your savings produce dependable income while you enjoy life.

You can also learn how affluent retirees help fund retirement with The Definitive Guide to Retirement Income from Fisher Investments. Download the guide now! (sponsor)