Will Social Security Be Taxed? How Income and State Rules Affect You

For many retirees, Social Security is a major source of income. But it helps to know whether those benefits will be reduced by taxes, and by how much.

Both where you live and how much income you have can affect whether you owe tax on your benefits. Here’s a look at how federal and state rules work, plus what rate you may face.

How federal taxes are determined

The federal government uses a combined-income formula to decide whether Social Security benefits can be taxed. That calculation adds your modified adjusted gross income, tax-exempt interest and half of your Social Security benefits.

For single filers, combined income below $25,000 means no federal tax on benefits. If income falls between $25,000 and $34,000, up to 50% of benefits may be taxable. Above $34,000, as much as 85% of benefits may be subject to tax.

Married couples follow a different set of thresholds. If combined income is under $32,000, none of the benefits are taxed. Between $32,000 and $44,000, up to 50% may be taxable, and above $44,000, as much as 85% of benefits may be subject to taxation.

How state taxes are determined

Most states do not tax Social Security benefits, and that includes Washington, D.C. Only eight states impose such taxes, and many offer income-based exemptions.

The states that tax Social Security are Colorado, Connecticut, Minnesota, Montana, New Mexico, Rhode Island, Utah and Vermont. Even in those states, your age and income may make you exempt.

What else to know about Social Security taxes

If your benefits are taxed at the highest federal level, that does not mean 85% of your benefits are taxed at an 85% rate. Instead, the taxable portion is treated like ordinary income and taxed at your regular income-tax rate.

Singles and married couples can use Form W-4V to have part of each Social Security payment withheld for taxes. That means less money in hand now, but it can help avoid a large tax bill later.

Without withholding, you could face a sizable bill when taxes are due. Planning ahead and setting aside some of your benefits can make tax season easier to handle.

If you want a closer estimate, you do not have to rely on guesswork. Last year’s figures can be entered into the IRS Publication 915 worksheet to help you estimate what you may owe and prepare accordingly.