The Income Threshold That Can Leave 85% of a Single Retiree’s Social Security Taxable

Many single retirees believe their Social Security benefits are protected from federal income tax, but a fairly modest amount of additional income can cause a large share of those payments to be taxed. Understanding what counts toward that limit can make a big difference.

Most older Americans today rely on Social Security alone. The average monthly retirement benefit is $2,088, or roughly $25,000 a year.

If you are single and your only income is an average Social Security benefit, you may be able to keep the full amount free from federal tax. But once your income rises to a moderate level, as much as 85% of your benefits could become taxable at the federal level.

How Social Security taxation is calculated

It may seem logical that because workers paid taxes on their earnings during their careers, retirement benefits should always be tax-free. In reality, a moderate amount of provisional income can cause up to 85% of Social Security benefits to be taxed.

Provisional income is figured by adding adjusted gross income, tax-exempt interest income such as interest from municipal bonds, and 50% of your yearly Social Security benefit. If that total falls between $25,000 and $34,000, up to 50% of your benefits may be subject to federal tax.

Once provisional income goes above $34,000, as much as 85% of your Social Security checks can be taxed by the federal government.

The limits are higher for married couples filing jointly, but singles have less room before taxes begin to apply. That is why it is important to know what counts in the calculation and keep provisional income as low as possible.

One way to keep more of your benefit

Reducing provisional income can lower the chance that your Social Security will be taxed. Where you keep your retirement savings can also play an important role in whether your benefits are taxed.

For example, suppose you are single and receive $2,000 a month from Social Security, or $24,000 a year. If your only other income is a $50,000 annual withdrawal from a traditional IRA, your provisional income would include $12,000, which is 50% of your Social Security benefit, plus the $50,000 withdrawal, for a total of $62,000.

In that situation, up to 85% of your Social Security benefits would be taxable.

Now assume that the $50,000 withdrawal comes from a Roth IRA instead. Roth withdrawals are not included in adjusted gross income, so provisional income would be only $12,000. In that case, none of your Social Security benefits would be taxed.

For retirees who want to protect more of their Social Security income, a Roth IRA may be a better option than a traditional IRA.

If you have already built savings in a traditional IRA, you could also consider a Roth conversion before claiming Social Security. That lets you move money into a Roth IRA, pay tax on the converted amount, and then take advantage of the Roth account’s tax benefits later.