Taxation of Social Security Benefits: Income Thresholds and the Impact of Additional Income
As you approach retirement, or if you are already drawing Social Security benefits, understanding how those benefits are taxed is more important than ever. Many people are surprised to learn that their Social Security income might not be entirely tax-free. And as your financial picture changes over time, what you owe in taxes may change, too.
Whether you’re planning your income strategy or simply trying to avoid unexpected tax bills, knowing how Social Security interacts with your other income is key to keeping more of what you’ve earned. With a little foresight, you can make smarter decisions about when to claim benefits and how to manage distributions from retirement accounts.
When Are Social Security Benefits Taxable?
Social Security benefits become taxable when your combined income exceeds certain thresholds set by the IRS. Combined income is defined as:
Adjusted Gross Income (AGI) + Nontaxable Interest + 50% of Social Security Benefits
If your combined income exceeds these thresholds, a portion of your Social Security benefits, up to 85%, may be subject to federal income tax.
Income Thresholds for Taxing Social Security
The IRS applies the following thresholds based on filing status:
Single Filers
- Less than $25,000: No benefits are taxable.
- $25,000 to $34,000: Up to 50% of benefits may be taxable.
- More than $34,000: Up to 85% of benefits may be taxable.
Married Filing Jointly
- Less than $32,000: No benefits are taxable.
- $32,000 to $44,000: Up to 50% of benefits may be taxable.
- More than $44,000: Up to 85% of benefits may be taxable.
It’s important to note that these thresholds are not indexed for inflation, which means more retirees find themselves subject to benefit taxation over time.
What Is Considered “Other Income”?
Additional income that factors into your combined income includes:
- Wages or self-employment earnings (if applicable in retirement)
- Distributions from retirement accounts (e.g., traditional IRAs or 401(k)s)
- Dividends and interest, including tax-exempt interest
- Capital gains
- Rental income and certain annuity payments
Even if your Social Security is your primary source of income, modest withdrawals from retirement accounts or investment income can result in a portion of your benefits becoming taxable.
A Note for Minnesota Residents
Minnesota has been gradually reducing its tax on Social Security benefits, offering exemptions based on income levels. For taxpayers with provisional income below state-defined thresholds, Social Security benefits may be fully exempt from Minnesota state tax. Those with income above these limits may still qualify for partial exemptions, reducing the amount of benefits subject to taxation.
These income thresholds are adjusted annually for inflation, and Minnesota’s approach to Social Security taxation continues to evolve over time. Trusted tax professionals can provide insights into these updates, helping retirees navigate changes with clarity and confidence.
Jeff Rislov, CPA and partner comments,
“About half of retirees rely on Social Security as a significant part of their income, so understanding how it’s taxed can make a big difference. A little planning goes a long way in feeling confident and at peace about the years ahead.”
Why This Matters
Understanding the taxation of Social Security is more than just a technical detail, it’s a crucial part of preserving your retirement income. By taking a proactive approach and working with a trusted advisor, you can better manage how and when you draw from other income sources and create a retirement plan that works for your goals.
Whether you’re just a few years away from claiming Social Security or already receiving benefits, the decisions you make today can significantly impact your future financial security. Our experts are here to help you to evaluate your options, forecast tax implications, and put together a strategy that aligns with your long-term needs. Give us a call at (888) 388-1040.
