The short answer is yes, the IRS can withhold federal income taxes from Social Security benefits if a recipient’s income exceeds a certain threshold. However, not all Social Security income may be taxed. The portion that is subject to federal income tax depends on the filer’s total combined income and filing status.
How are Social Security benefits taxed?
Social Security benefits were not taxable until 1983 when Congress passed legislation requiring recipients whose incomes exceeded certain limits to pay tax on a portion of their benefits. Since then, up to 85% of Social Security income can be subject to federal income tax depending on the recipient’s total combined income and tax filing status.
Combined income includes adjusted gross income, non-taxable interest, and half of Social Security benefits. The thresholds that determine what portion, if any, of Social Security retirement benefits are taxable are not adjusted for inflation and remain the same year after year.
| Filing Status | Percentage of Benefits Taxed |
|---|---|
| Individuals with combined income of $25,000 to $34,000 | Up to 50% |
| Joint filers with combined income of $32,000 to $44,000 | Up to 50% |
| Individuals with combined income over $34,000 | Up to 85% |
| Joint filers with combined income over $44,000 | Up to 85% |
As the table shows, single taxpayers with incomes between $25,000 and $34,000 may have to pay income tax on up to 50 percent of their benefits. If their income exceeds $34,000, up to 85 percent of their benefits may be taxable. The thresholds are slightly higher for joint filers.
How does the IRS calculate the taxable portion?
The IRS uses a formula to calculate the taxable portion of Social Security benefits. First, they determine the filer’s combined income by adding adjusted gross income, nontaxable interest income, and half of Social Security benefits received. Then, they compare this total to the base threshold amounts of $25,000 (single) or $32,000 (married filing jointly).
If combined income equals or falls below the threshold, none of the benefits are taxable. If it is above the threshold but under $34,000 (single) or $44,000 (joint), the taxable portion is the lesser of half the benefits or 50% of the excess over the base amount. If combined income exceeds the higher threshold, up to 85% of benefits may be taxed.
For example:
- A single filer has $20,000 in adjusted gross income, $5,000 in nontaxable interest, and received $12,000 in Social Security benefits. Half of the benefits equals $6,000. Their combined income is $20,000 + $5,000 + $6,000 = $31,000. This is above the $25,000 base threshold but less than $34,000, so up to 50% of the excess over $25,000 is taxable. 50% of $6,000 excess equals $3,000 taxable benefits.
- A joint filer has $40,000 in adjusted gross income, $7,000 in nontaxable interest, and received $14,000 in Social Security benefits (half =$7,000). Their combined income is $40,000 + $7,000 + $7,000 = $54,000. This exceeds the higher $44,000 threshold, so up to 85% of their benefits may be taxable. 85% of $14,000 is $11,900 in taxable benefits.
Common scenarios when benefits are taxed
Here are some common situations when Social Security recipients may have to pay federal income tax on a portion of their retirement benefits:
- Earning wages – Income from a job or self-employment can easily push combined income over the thresholds, resulting in taxable benefits.
- Withdrawing from IRAs or 401(k)s – Required minimum distributions and withdrawals from traditional retirement accounts get included in adjusted gross income.
- Investment income – Interest, dividends, and capital gains increase adjusted gross income.
- Pensions and annuities – Income from private or public pensions will be factored into total combined income.
- Rental income – Profits from rental real estate add to adjusted gross income.
In addition, Social Security recipients with higher Medicare premiums may have to pay tax on benefits that they would otherwise not owe tax on. This is because Medicare premiums reduce adjusted gross income, effectively shielding benefits from taxation. So higher premiums mean more benefits may be taxed.
When are Social Security benefits not taxed?
There are also scenarios where Social Security recipients can exclude some or all benefits from federal income tax:
- Income under thresholds – Filers whose combined income falls below the base threshold for their filing status will not owe any income tax on benefits.
- Only Social Security income – Recipients who have no other income except Social Security will not have their benefits taxed, since there is no adjusted gross income to add into the calculation.
- Some tax-exempt interest – Interest from municipal bonds and certain other exempt sources are not added to combined income.
- Non-filers – Social Security recipients who are not required to file tax returns can exclude benefits from their gross income.
How does the IRS collect the tax?
There are a few different ways the IRS can collect income tax on Social Security benefits:
- Estimated tax payments – Retirees who expect to owe tax on benefits can make quarterly estimated payments to the IRS to pay the tax as they receive benefits during the year.
- Withholding from benefits – Recipients can choose to have federal income tax voluntarily withheld from their monthly Social Security payments. They can request withholding at 7%, 10%, 12% or 22% of total benefits paid.
- Balance due at tax time – If no estimated taxes or withholding are done, any tax owed on benefits is paid as a balance due on the year’s tax return.
- Refundable tax credits – Low income beneficiaries may be able to use the Earned Income Tax Credit or Additional Child Tax Credit to offset taxes owed on benefits.
Conclusion
In summary, up to 85% of Social Security retirement benefits may be taxed by the IRS if the recipient’s total combined income exceeds certain thresholds. The portion subject to federal income tax is based on a calculation that compares their adjusted gross income, nontaxable interest, and half of benefits to the indexed threshold amounts for their filing status. Beneficiaries whose income exceeds the thresholds can expect to owe tax on a portion of benefits when they file their annual tax return.
