Calculating Taxes on Social Security Benefits
Uncle Sam can tax up to 85% of your Social Security benefits if you have other sources of income, such as earnings from work or withdrawals from tax-deferred retirement accounts.
March 23, 2021
Many people are surprised to learn that Social Security benefits are taxable. But if you look at how the federal tax on Social Security is calculated, you'll notice that benefits aren't taxed for most people who only have income from Social Security.
For 2021, the estimated average monthly Social Security check is $1,543, which comes to $18,516 per year. That's well below the minimum amount for taxability at the federal level.
On the other hand, if you do have other taxable income—such as from a job, a pension or a traditional IRA—then there's a much better chance that Uncle Sam will take a 50% or 85% bite out of your Social Security check. Plus, depending on where you live, your state might tax a portion of your Social Security benefits, too.
How Federal Taxes on Social Security Are Calculated
If you're trying figure out if your Social Security benefits will be taxed, the first thing you need to do is calculate your "provisional income." Your provisional income is equal to the combined total of (1) 50% of your Social Security benefits, (2) your tax-exempt interest, and (3) the other non-Social Security items that make up your adjusted gross income (minus certain deductions and exclusions).
For single people, your Social Security benefits aren't taxed if your provisional income is less than $25,000. The threshold is $32,000 if you're married and filing a joint return. If your provisional income is between $25,000 and $34,000 for a single filer, or from $32,000 to $44,000 for a joint filer, then up to 50% of your Social Security benefits may be taxable. If your provisional income is more than $34,000 on a single return, or $44,000 on a joint return, up to 85% of your benefits may be taxable.
State Taxation of Social Security Benefits
In addition to federal taxes, some states tax Social Security benefits, too. The methods and extent to which states tax benefits vary. For example, New Mexico treats Social Security benefits the same way as the federal government. On the other hand, some states tax Social Security benefits only if income exceeds a specified threshold amount. Nebraska, for instance, taxes Social Security benefits only if your income is at least $43,000, or $58,000 if you're married filing a joint return. Utah includes Social Security benefits in taxable income but allows a tax credit for a portion of the benefits subject to tax.
For information about state Social Security taxes, see 13 States That Tax Social Security Benefits. If you don't live in a state that taxes Social Security benefits, check out 38 States That Don't Tax Social Security Benefits for information on income, sales, property and estate taxes that retirees might face. Also see Kiplinger's State-by-State Guide for Taxes on Retirees for the full tax picture in each state, and our lists of the 10 most tax-friendly states for retirees and the 10 least tax-friendly states for retirees.
Exclusive Social Security Benefits Forecast: COLA Likely to Jump to 3% in 2022
The cost of living adjustment would be fueled by rising gas prices and the recently passed stimulus package that could spur additional consumer spending.
by: David Payne
March 10, 2021
Social Security benefits should rise around 3% next January, up from the increase of 1.3% seen this year, according to an early cost of living adjustment (COLA) calculation by the Kiplinger Letter.
This would be the largest increase since 2012 when Social Security benefits ticked up 3.6%.
A range of prices that had been depressed by the pandemic last year are rebounding. Gasoline prices have risen 23% since the beginning of the year. Medical care costs are also making up for lost time as well. As the economy opens up more fully with the retreat of the pandemic, more prices are likely to reclaim some lost ground, such as air fares and sporting events.
The 1.3% increase for 2021 was the smallest COLA since 2017.
COLAs are calculated using the Consumer Price Index for Urban Wage Earners and Clerical Workers (similar to, but not exactly the same as, the urban dwellers’ consumer price index used in inflation reporting). If prices don’t increase and even fall, the COLA is zero. That happened in 2010 and 2011, as the economy struggled to recover from the Great Recession, and again in 2016, when plummeting oil prices swept away any chance of a COLA for that year.
Because the COLA is calculated based on changes in a federal consumer price index, the size of the COLA depends largely on broad inflation levels determined by the government. In 2021, Social Security beneficiaries will see a 1.3% COLA in their monthly Social Security benefits.
The Kiplinger Letter forecast in March that the 2022 COLA would be 3%, which would be the largest increase since 2012 when Social Security benefits ticked up 3.6%.
Here’s what COLAs have been in other recent years:
For a State-by-State Guide to Taxes on Retirees, click here