The Hidden Taxes on Social Security

Many people are surprised to learn that Social Security can be taxed. Whether yours is taxed depends on your other income, and that is something you can often plan around.

Key takeaways

• Social Security is not taxed for everyone, but up to 85% of benefits can be taxable
• The IRS uses a number called provisional income to decide
• The income levels in this formula are not adjusted for inflation, so more retirees reach them over time
• Withdrawals from different accounts affect your tax in different ways

What provisional income means

Provisional income is the IRS's way of measuring your "total picture" for this one purpose. In plain terms, it adds up your adjusted gross income, any tax-exempt interest, and half of your Social Security benefits.

If that total is under the first limit, your benefits are generally not taxed. Above it, up to 50% of your benefits can be taxable. Above the second limit, up to 85% can be taxable.

Note that "85% taxable" does not mean an 85% tax. It means 85% of your benefit is counted as income, and then taxed at your normal rate.

Why it surprises people

Those limits were set decades ago and are not indexed for inflation. As incomes rise over time, more retirees cross the line. The amounts are set by law, so check the current figures with the IRS or Social Security before you plan.

Many people find the surprise comes from money they did not think of as income, such as:

• Required withdrawals from a traditional IRA or 401(k)
• Interest and dividends from savings and investments
• Part-time work in early retirement
• A large one-time withdrawal or the sale of an investment

Questions worth asking

There is no single move that works for everyone. A few ideas many people look at with their advisor and tax preparer:

1. Which accounts will I draw from first? Money from a traditional IRA counts as income. Money from a Roth IRA generally does not count toward provisional income.
2. Should I fill lower tax brackets earlier? Some people move money to a Roth IRA in years when their income is lower, which may reduce required withdrawals later.
3. Could charitable giving help? If you are over 70½, a qualified charitable distribution sends money from an IRA straight to a charity. It is not included in your income.
4. When should I claim? The age you claim affects your monthly amount. It can also change how much other income you need to cover in the early years.

The order in which you take money from your accounts can matter as much as how much you take.

Sources and references

• IRS: Social Security income (opens in a new tab)
• Social Security: Income taxes and your benefits (opens in a new tab)

This article is general information, not tax or investment advice for your situation. Tax rules change; talk with a qualified professional before acting.