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How Much Will My Social Security Be Taxed?

November 29, 2020
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Imagine paying taxes on 85% of your social security income at your highest marginal tax bracket.

This is not a post on the financial condition of the social security program or how to fix the crippling deficits that it will soon face. Rather, this post is to help provide an understanding of how your social security income will likely be taxed in retirement and how to potentially receive it tax-free (or seriously tax-mitigated at least). For purposes of this post, we’re going to assume (yes, we are aware of what can happen when you assume) that social security will be there.

You deserve every nickel you can receive from social security. There are many claiming strategies that exist—when to claim and which spouse should go first under which circumstances; restricted applications; spousal benefits, etc.—and as a National Social Security Advisor, I'm very tuned into those things. Claiming strategies are an important part of your retirement income planning. However, those will be addressed in other posts. For now, let's focus on how your social security income (SSI) is likely taxable in retirement.

On its own, social security income is tax-free.

Whether you get $200/mo or $3,000/mo, SSI does not incur taxes on its own. This is critical to comprehend upfront. Perhaps few things make a prospective retiree’s stomach curdle more than realizing that his social security income will be up to 85% taxable at his highest marginal tax bracket.

“Wait!” we shout, “wasn’t social security a tax out of our paychecks in the first place? Now we have to pay taxes on the pittance we’re going to get in retirement?”

Maybe. Well, let’s be honest, probably—unless you’ve done the proper retirement planning. The vast majority of retirees have not, nor have their advisors properly prepared them to avoid this. To be fair, this is a subject area that few are trained in professionally (meaning retirement income planning in general and the more focused tax-free retirement planning). For many retirees, taxes on their social security income is unnecessary and avoidable (partially or completely).

Whether your social security income is tax-free or taxable (up to 85%!) at your highest marginal tax bracket depends entirely on how the rest of your retirement is set up.

What Causes My Social Security Income To Become Taxable?

Within the tax code there is a nasty little thing called “Provisional Income” (PI). This started under President Reagan and got worse under Clinton. PI is a classification of different income sources that, when added up, determine if and to what extent your SSI will be taxable.

Sources of income that are considered Provisional Income include (but are not limited to):

  • W2 wages
  • 1099 self-employment income
  • Bonuses
  • Pension income
  • 401k/403b/457 (qualified plan) distributions
  • IRA (Traditional, SIMPLE, and SEP) distributions (including RMDs)
  • Bank account/money market/CD interest
  • Bond interest
  • Capital Gains (stocks, mutual funds/ETFs, real estate, bonds, commodities, etc.)
  • Rental income
  • Royalties
  • 50% of your Social Security Income


As you can see, quite a list. It’s easy to ask, “what isn’t considered Provisional income?” We will cover that shortly. And yes, even half of your social security income is included in the calculations to determine if and to what extent your SSI will be taxable [sigh of disgust].

The next step in determining if the taxable nature of your SSI is to understand the “thresholds” that the Provisional Income total must surpass in order to start eroding your social security income with unnecessary taxes.

Provisional Income Thresholds

If the summation of all your Provisional Income sources pass certain thresholds, you will find yourself paying taxes at your highest ordinary income tax bracket on 50-85% of your social security income. Unfortunately, the thresholds are not very high. It breaks down as follows:

If Your PI is Equal To or More Than:Then:
$32,000 ($25,000 for single filers)50% of your SSI is taxable
$44,000 ($34,000 for single filers)85% of your SSI is taxable

As you can see, the powers that be (and those that have been) have not given us much room in this calculation. Trying to live on less than $32,000 in retirement (for those married filing jointly) in order to avoid taxation on our social security income is not a good solution. Such a drastic measure would leave us with little reason to call the retirement years the Golden Years. These amounts are not even indexed for inflation; they have been the same since their introduction.

Fortunately, there are some things that can be undertaken to mitigate the erosion of your SSI by taxes without living on a severe budget.

What Types Of Income Do Not Count As Provisional Income?

Distributions from Roth IRAs, Roth 401Ks, and Life Insurance Retirement Plans/Programs (LIRPs) do not count as Provisional Income. So, looking at things in a vacuum, if you had $100,000 per year coming to you in retirement from a Roth and/or a LIRP (properly structured), and $30,000 a year in SSI (assuming these were your only two sources of income), you would receive that SSI completely tax-free. By contrast, if you had just $45,000 a year coming to you from a regular 401K/IRA, and $30,000 from SSI, you would pay taxes on your 401K/IRA income and 85% of your SSI at your highest marginal tax bracket because your PI would be $60,000 (401K/IRA income of $45,000 plus half of SSI, $15,000). That's well above the $44,000 PI threshold.

For a detailed discussion on taxes in retirement, see our post “The Tax Columns—How Will Taxes Affect My Retirement?”

This may not sound fair, but that’s not the point. These are the rules. Proper planning should take advantage of the rules to their fullest for your benefit. That’s why they exist. You have options. Explore them.

A large part of our practice is dedicated toward defusing the tax bombs many unwittingly create in the retirement strategies, especially when following conventional wisdom. Implementing tax-free strategies can have many long-lasting positive effects on your retirement, some of which we explore below.

Some have said that taxation of social security income is necessary to help replenish the Social Security Trust Fund. That is simply untrue. Payroll taxes fund social security, not income taxes. You pay income tax on your SSI (if your PI is above those thresholds), not payroll tax. The taxes on SSI do not replenish the so-called trust fund.

Judge Learned Hand famously penned the quote: “Any one may so arrange his affairs that his taxes shall be as low as possible; he is not bound to choose that pattern which will best pay the Treasury; there is not even a patriotic duty to increase one's taxes.”

Why Does This Matter?

Recall that taxes on your SSI are unnecessary, that it is tax-free on its own. Using tax-inefficient vehicles (such as 401Ks and IRAs and their siblings) taint your social security income with taxes. In fact, causing social security income to become taxable is yet another tax-liability that 401Ks and IRAs have. They are the culprits, not your SSI.

The significance of receiving your social security income tax-free is hard to overstate. In our experience, it allows the other retirement assets a household has accumulated to last 5-7 years longer than they would have if social security were taxable. For so many people, this is completely within reach with proper planning. It relieves stress on your other assets and may even allow you to take less risk in your overall portfolio in order to achieve your overall goals. If your current projections show you running out of money at 83 (using reasonable assumptions), then perhaps with tax-mitigated SSI, your portfolio lasts until age 88-90 with the same assumptions because you now need to draw less from your other accounts.

You get it, right?

Even if receiving your social security income entirely tax-free is not possible in your situation, consider this. For a simplified example that portrays the point, imagine that you receive $30,000 per year of social security income between you and your spouse. Assume having to pay taxes on 85% of your SSI at a 33% combined federal and state tax-bracket because you have taken the conventional wisdom path of retirement planning (qualified, tax-deferred plans, etc.). (NOTE: Recall from our “Tax Columns” post that most have very few deductions in retirement compared to the working years, not to mention that all-but-certain rise of taxes in the future.)

That would leave you with a net SSI of $21,585 after taxes.

After some strategizing with someone who understands tax-free retirement planning, imagine that you are able to get down to paying taxes on only half of your SSI (instead of 85%) at a 22% combined tax-bracket.

Now your net SSI looks more like $26,700. That’s an increase of nearly 24%. When is the last time you received a 24% income increase without having to take any additional risk? Or do a lot of overtime? Proper planning often allows you to keep more of what you are already earning. Doesn’t that seem like a more logical place to start? Rather than, say, taking more risk? Or shrinking your lifestyle?

What if, like so many people we help, you can cut out taxes from your SSI completely through proper tax-free retirement planning? At the risk of pointing out the obvious, your net SSI would be the full $30,000, and increase of nearly 40% in income.

Over many years of retirement, that increase is significant. So, even if your income sources make it difficult to get your SSI completely tax-free (such as a pension that is greater than the Provisional Income thresholds), there are often things that can be done to mitigate the tax bite, take stress off your other retirement assets, and increase the amount and/or longevity of your retirement income.

What is this really?

Fee reduction.

Simply as that. Taxes are the largest fee we pay in retirement. Reduce your fees!

Financial education is critical. Understanding Provisional Income, how taxes affect your social security income, and what assets/income sources do and do not count as PI are foundational to being able to enhance your retirement outlook. Your golden years might depend on it.