An In-Depth Guide to Social Security Retirement Benefits and Taxes

Published on January 22, 2025 | Webster Bank

Social Security is a vital component of retirement income for many. This government program provides monthly benefits and is funded primarily through payroll taxes. Understanding Social Security benefits and taxation is essential to making informed decisions about when to start receiving them.

This in-depth guide focuses on the interplay of Social Security retirement benefits and income taxes.

How Social Security is taxed

The association between social Security and taxes often needs to be understood. Not all social security benefits are taxable. The amount of social security benefits one receives and how much Federal tax applies depends primarily on the income level of the receiver and other factors. It’s important to note that some states currently tax Social Security benefits: Colorado, Connecticut, Minnesota, Montana, New Mexico, Rhode Island, Utah, Vermont, and West Virginia.

If Social Security benefits are the only source of income for the year, the benefits may not be taxable. However, if income is received from other sources, such as wages, self-employment, interest, dividends, etc., up to 85% of the benefits may be taxable.

To determine if Social Security benefits are taxable, calculate your “combined income.” Combined income is the total of your adjusted gross income, non-taxable interest, and half of your annual Social Security benefits. Note that depending on marital status, Social Security is taxed differently.

Social Security and taxes in 2025

The rules and regulations regarding Social Security and taxes can be complex and may change. Therefore, consulting with financial and tax professionals versed in Social Security retirement benefits and taxation is vital.

For single taxpayers – If your income is between $25,000 and $34,000, income tax will apply to up to 50% of your Social Security benefits. If income exceeds $34,000, up to 85% of the benefits may be taxable.

For married taxpayers filing jointly – If you and your spouse have a combined income of $32,000 to $44,000, you may have to pay income tax on about 50% of your Social Security benefits. If joint income exceeds $44,000, up to 85% of your Social Security benefits may be subject to taxation.

Despite the complexity of Social Security taxes, these two aspects are crucial to retirement income and tax planning throughout retirement. Understanding how retirement income and draw-down strategies, Social Security benefits, and taxes work together is vital to financial management in later life stages.

Consulting with financial and tax professionals may mitigate unexpected tax implications when receiving Social Security benefits and drawing down retirement savings assets.

Sources:

https://www-origin.ssa.gov/benefits/retirement/planner/taxes.html

https://finance.yahoo.com/news/41-states-won-t-tax-120052096.html

Important Disclosures:

This material was created for educational and informational purposes only and is not intended as ERISA, tax, legal or investment advice. If you are seeking investment advice specific to your needs, such advice services must be obtained on your own separate from this educational material.

All information is believed to be from reliable sources; however, LPL Financial makes no representation as to its completeness or accuracy.

This article was prepared by Fresh Finance.

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