Your Social Security Benefit and Income Taxes

Key Takeaways

• Social Security taxation is based on "combined income" (100% of AGI + 50% of Social Security benefits + tax-exempt interest); married couples with combined income under $32,000 and singles under $25,000 owe no tax, but thresholds haven't been adjusted for inflation in 40 years, causing 5 times more people to be taxed today than in 1983
• Only up to 85% of Social Security is taxable (not all of it), and the actual percentage taxed depends on a three-part mathematical test—most tax software incorrectly assumes all Social Security is 85% taxable, so work with a CPA familiar with Social Security taxation
• Delay claiming Social Security from age 62 to 70 can significantly reduce lifetime taxes: in the case study, delaying reduced cumulative taxable income from $2.195M to $1.157M, even though annual Social Security benefits were much higher at age 70
• Use retirement account withdrawals strategically before age 62 to manage your combined income in early retirement; consider Roth conversions while in a lower tax bracket before claiming Social Security and before age 72 RMDs kick in
• Twelve states tax Social Security benefits in addition to federal taxation (with varying rules); income from federal Social Security taxation goes into the Social Security Trust Fund, not the general fund as some believe