The Social Security Tax Truth Every Retiree Needs To Know—And Smart Moves To Keep More Money in Your Pocket
Expert reveals what triggers taxes on benefits—and the savvy strategies that help you pay less
It’s almost tax season, and with that comes a whole new wave of warnings, tips and information from experts. This year in particular, the buzz is about taxes on Social Security, which Eric Bronnenkant, the head of tax at Edelman Financial Engines says “you can’t avoid.” To learn more about Social Security taxes, including how other sources of retirement income can impact it, keep scrolling.
What to know about Social Security taxes
Taxes on one’s Social Security benefits are determined by the Internal Revenue Service (IRS) and are based on one’s adjusted gross income, non-taxable municipal bond interest and half of one’s Social Security benefits—all of which they refer to as one’s “combined income.”
From there, beneficiaries can have the taxable amount automatically taken out of their account every month or they can make manual payments to the IRS every three months using Form 1040-ES.
In recent months, there’s been a lot of speculation over whether new legislation, like President Donald Trump’s One Big Beautiful Bill Act, eliminated taxes on Social Security. According to Bronnenkant, “While there is a new enhanced senior deduction for individuals ages 65 or older up to $6,000 per spouse, there were no changes to the formula for Social Security benefit taxation.”
“For a significant portion of history, Social Security benefits were tax-free for everyone. First, a law passed in 1983 made up to 50 percent of the benefits taxable. Subsequently, a law passed in 1993 made up to 85 percent of the benefits taxable. Under current law, the maximum portion of benefits that are taxable is 85 percent,” Bronnenkant continued. “When your combined income rises above certain IRS thresholds, some of your Social Security benefits can be taxed. Those thresholds haven’t been indexed for inflation, which means as incomes rise, more retirees can end up owing taxes on benefits they assume would be tax-free. This concept of taxes rising merely due to inflation is known as a ‘stealth tax.’”
Another big aspect surrounding taxes on Social Security is where one lives. Currently, nine states tax the funds—Colorado, Connecticut, Minnesota, Montana, New Mexico, Rhode Island, Utah, Vermont and West Virginia. But according to Bronnenkant other states tax 401(k) distributions, IRAs, pensions and investment income.
How other sources of retirement income impact taxes
“While Social Security itself may be exempt from state tax in certain states, other retirement income is often taxable. Distributions from Traditional IRAs and Traditional 401(k)s, pensions and investment income can all count toward your taxable income,” explains Bronnenkant.
“Since Social Security taxation at the federal level depends on your combined income, larger withdrawals from Traditional 401(k)s or pension income can increase your total income and cause more of your Social Security benefits to become taxable,” he says. “Additionally, continuing to work and earn wages in retirement, even after claiming Social Security, does not exempt that income from Social Security payroll taxes.”
Can you avoid Social Security taxes?
If you live in one of the nine states that taxes Social Security, you cannot avoid paying them, says Bronnenkant; but there are ways you can help minimize the financial impact the charges have on your bank account.
“Drawing heavily from pre-tax accounts (like traditional IRA or Traditional 401(k) accounts) in years when your combined income is high increases your taxable income and may lead to more Social Security taxes. Strategic planning around withdrawals can help control your tax bracket,” he says.
How to correctly pay your Social Security taxes
To correctly pay your Social Security taxes, Bronnenkant recommends either logging into your my Social Security account or filing the IRS Form W-4V. He also recommends you make sure your information on those accounts is up to date, since things like marriages, deaths and divorces can impact how much you pay.
“Marriage may increase benefits, but the IRS thresholds for Social Security benefit taxation for joint filers are less than twice the single threshold,” he explains. “This is known as the marriage penalty. Upon death, there may be a survivor benefit increase (possibly a household benefit decrease) but is also met with single tax rates instead of joint tax rates in future years. Divorce is a more complicated issue to discuss with your advisor.”
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