Social Security and Taxes: 4 Things to Know

One enduring myth about Social Security is that benefit payments are not subject to federal income taxes. While this was true from the program’s inception in the 1930s until Congress overhauled its financing in the 1980s, for the past 40 years, some portion of Social Security income has been taxable for certain beneficiaries.

Whether your benefits are taxable depends on your income. If you rely solely on Social Security, it’s unlikely that you earn enough for your benefits to be taxed. However, if you have other sources of income, such as work or retirement account withdrawals, there's a higher chance that you will owe taxes on some of your benefits.

Here are four things Social Security recipients, present and future, should know about taxation of benefits.

1. Income Matters — Age Doesn’t

Contrary to another common misconception, you don’t stop paying taxes on your Social Security benefits when you reach a certain age. Your income, and only your income, determines whether you owe federal taxes on your benefits.

To determine this, the IRS calculates your combined or provisional income by adding up your adjusted gross income (AGI), tax-exempt interest income, and half of your Social Security benefits for the year. If this figure exceeds $25,000 for an individual taxpayer or $32,000 for a married couple, a portion of your benefits is taxable.

These minimum thresholds have remained unchanged since the taxation of benefits was introduced. As incomes have risen over the decades, so has the share of Social Security recipients whose benefits are taxed — from less than 10 percent in 1984 to nearly half in recent years, according to data from the Social Security Administration (SSA).

2. You Can Have Federal Taxes Withheld from Benefits

If you anticipate owing taxes on your benefits, you can effectively prepay a portion of the bill by having taxes withheld from your monthly Social Security payments.

You can opt for withholding as part of your application for Social Security or choose to do so later by completing IRS Form W-4V and submitting it to a Social Security office. In either case, you can choose to have 7 percent, 10 percent, 12 percent, or 22 percent of your benefits applied to your next IRS bill.

3. Taxes on Benefits Help Pay Benefits

By law, federal income taxes collected on Social Security benefits are allocated to the government’s Social Security and Medicare trust funds, thus contributing to future benefit payments.

In 2022, income taxes on benefits totaled $48.6 billion, accounting for approximately 4 percent of Social Security's revenue. The majority of Social Security's revenue comes from payroll taxes levied separately on most U.S. workers’ earnings.

4. Some States Tax Social Security

While most states do not tax Social Security income, residents of Colorado, Connecticut, Kansas, Minnesota, Missouri, Montana, Nebraska, New Mexico, Rhode Island, Utah, Vermont, or West Virginia may find that some portion of their 2023 benefits is subject to state income taxes, under widely varying rules and formulas. The revenue generated from these taxes typically goes into the states’ general funds.

Most of these states use different criteria than the federal government for taxing Social Security payments, setting higher income thresholds, offering various deductions, or otherwise limiting taxation of benefits in ways that exempt many beneficiaries.

For example, in New Mexico, Social Security income is fully deductible for residents with adjusted gross incomes (AGIs) below $100,000 for an individual and $150,000 for a couple. Colorado residents aged 65 and over can fully deduct their benefits. Missouri and Nebraska are even ending the taxation of Social Security income, starting with the 2024 tax year.

AARP has supported legislative efforts in multiple states to reduce or eliminate the taxation of benefits. To find out how benefits and other forms of retirement income are taxed in your state, check with its tax or revenue office.