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How Much Tax Is Paid On Social Security Benefits

Minnesotas Income Tax Does Not Apply To Social Security Benefits

How to pay less in taxes on your Social Security benefits

Social security benefits received by Minnesota residents are taxed under federal and state laws, depending on their age and income. Under federal law, half of a recipients benefits are exempt from income taxes. However, in 1993 Congress lowered the exemption to fifteen percent, which is equal to what the average recipient contributed during their working years. In addition, the federal government may exclude additional amounts depending on the amount of income a taxpayer has. The amount of exemption that a Minnesota resident can claim depends on federal calculations of his or her adjusted gross income and provisional income.

The Minnesota Senate voted 42-24 to reduce the income tax rate for the lowest income bracket, and to eliminate the state income tax on social security benefits. Both proposals were aimed at making income tax relief permanent and reducing the states budget deficit. However, a Republican legislator argued that eliminating the income tax on Social security benefits would result in a tax benefit for wealthy retirees.

How Social Security Benefits Are Taxed

Here are the rules regarding taxes on Social Security benefits, per the Social Security Administration :

  • If you file a tax return as Single, Head of Household, or a Widow and your combined income is:
    • between $25,000 and $34,000, then you may be taxed on up to 50% of your benefits.
    • greater than $34,000, then you may be taxed on up to 85% of your benefits.
  • If you file a tax return as Married Filing Jointly and your combined income is:
    • between $32,000 and $44,000, then you may be taxed on up to 50% of your benefits.
    • greater than $44,000, then you may be taxed on up to 85% of your benefits.

To begin, we must define what the SSA means by “combined income.” Combined income equals your adjusted pre-tax income for the year plus nontaxable interest plus half of your Social Security benefits.

Your adjustable gross income is the amount of money you, and your spouse if you are filing jointly, earned this year from wages, dividends on investments, pensions, and any other income sources other than Social Security. If you have any municipal bonds in your investment portfolio, then you’ll probably also have nontaxable interest. Certain savings bonds may be tax-exempt, as well.

Finding what half of your annual Social Security benefit is simple. If you don’t know how much in benefits you’ve received, create an online my Social Security account.

It Takes Some Work But We’ll Help You Figure It Out

Nobody likes to pay taxes, but nearly everyone has to. Even once you’ve stopped working, you might still need to file a tax return and pay income tax — and shockingly, you might also have to include some of your Social Security benefits as taxable income on your return.

Unfortunately, it’s often not easy to figure out exactly what tax rate you’ll pay on your Social Security benefits. That’s because there are a few different steps you’ll have to follow to see which tax rate applies to you. Below, we’ll look at the process of figuring out what tax rate you’ll pay on your monthly benefits.

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How Social Security Is Taxed

Those who have income in addition to their Social Security checks are on the hook to pay federal income tax on up to 85% of their benefits.

If and how much you are taxed depends on your tax status and income. It is based on a beneficiarys provisional income, which is equal to half of their Social Security benefit plus their modified adjusted gross income and nontaxable interest:

  • Individuals who earn between $25,000 and $34,000 may pay income tax on up to 50% of their benefits. Those who earn more than $34,000 may pay taxes on up to 85% of their benefits.
  • Couples filing jointly with a combined income between $32,000 and $44,000 may pay income tax on up to 50% of their benefits. Those who earn more than $44,000 may be taxed on up to 85% of their benefits.

If the COLA pushes you above those income thresholds, then you could be on the hook for paying more in taxes .

Notably, these income thresholds have not been adjusted for inflation since they were established decades ago. Rising benefit levels subject more benefits to taxation, reducing the net benefit and applying to more beneficiaries over time, according to a report from the Center for Retirement Research at Boston University.

When the taxation of benefits was first introduced in the 1980s, 8% of eligible families paid taxes on their benefits, according to the report. Today, an estimated 56% of beneficiary families pay taxes.

State Taxes On Social Security

Calculator figures how much social security benefit is taxable

Twelve states tax Social Security benefits in some cases. Check with your state tax agency if you live in one of these statesColorado, Connecticut, Kansas, Minnesota, Missouri, Montana, Nebraska, New Mexico, Rhode Island, Utah, Vermont, or West Virginia. As with the federal tax, how these agencies tax Social Security varies by income and other criteria.

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Paying Social Security Taxes On Earnings After Full Retirement Age

Everyone must make applicable Social Security contributions on income, even those working past full retirement age. Working past full retirement age may also increase Social Security benefits in the future because Social Security contributions continue to be paid in.

At What Age Is 401k Withdrawal Tax Free

The 401 Withdrawal Rules for People Older Than 59 ½ Stashing pre-tax cash in your 401 also allows it to grow tax-free until you take it out. There’s no limit for the number of withdrawals you can make. After you become 59 ½ years old, you can take your money out without needing to pay an early withdrawal penalty.

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How Social Security Taxes Work

The fact that levies are applied to benefits is “extremely unpopular,” Altman said. “People hate it, but it actually makes policy sense,” she said.

One key reason that it makes for good policy is that Social Security benefits and private pensions are taxed in a similar way.

When the program was created in 1935, benefits were not taxed. That began to change in 1983, when Congress changed the rules so that up to 50% of Social Security benefits could be included in taxable income, if a taxpayer’s income was over certain thresholds.

More changes came in 1993, which raised the portion of certain Social Security benefits subject to taxation to 85%. That change applied to higher income beneficiaries.

The result is a complicated set of rules that still applies today.

First, the taxes are based on what is known as provisional or combined income. That includes half of your Social Security benefits plus your adjusted gross income and nontaxable interest. That means that any income from wages, interest, dividends or other taxable income is counted.

Then the 50% and 85% thresholds are applied.

Individuals with combined income between $25,000 and $34,000 will pay income tax on up to 50% of their benefits. That also goes for couples with incomes between $32,000 and $44,000.

Individuals with combined income of more than $34,000, as well as couples with more than $44,000, may pay tax on up to 85% of their benefits.

No Matter How You File Block Has Your Back

Is Social Security Taxable?
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    When Is Social Security Income Taxable

    To determine when Social Security income is taxable, youll first need to calculate your total income. Generally, the formula for total income for this purpose is: your adjusted gross income, including any nontaxable interest, plus half of your Social Security benefits.

    If youre married and filing jointly with your spouse, your combined incomes and social security benefits are used to figure your total income.

    Then youll compare your total income with the base amounts for your filing status to find out how much of your Social Security income is taxable, if any.

    Youll see that you fall into one of three categories. If your total income is:

    • Below the base amount, your Social Security benefits are not taxable.
    • Between the base and maximum amount, your Social Security income is taxable up to 50%.
    • Above the maximum amount, your Social Security benefits are taxable up to 85%.

    When You Have To Include Some Social Security As Taxable Income

    Only if your countable income is above those threshold numbers do things get complicated. The general rules that apply to Social Security taxation are as follows:

    • For single filers with countable incomes between $25,000 and $34,000 and joint filers with incomes between $32,000 and $44,000, up to half of your benefits can be included in taxable income.
    • For single filers with countable incomes above $34,000 and joint filers with incomes above $44,000, up to 85% of benefits can get treated as taxable income.

    However, there are a couple of nuances here. First, the actual percentage of your Social Security that you have to include in taxable income can vary widely, and while it can’t exceed 50% or 85% for the respective categories above, it can be quite a bit below that. For instance, if you’re single and your countable income was $25,002, then only $1 of your Social Security income would be subject to tax.

    Second, even once you do this calculation, it only tells you how much of your benefits you have to include in your income. To find out how much tax that will produce, you also have to know your marginal income tax rate.

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    Do I Have To File Taxes If My Only Income Is Social Security

    Some people get excited about filing their taxes, and others dread the idea of owing more money to the government. Even if youre receiving a modest monthly income from social security, youre still required to file your federal and state taxes. Your income will be higher than you think, and youll owe the government money in the end.

    Applying Tax Brackets To Social Security Income

    Social Security: Will You Get Your Money

    It’s impossible to come up with a single rule that will cover every situation involving income taxes and Social Security benefits. However, you can come up with some general observations that can provide some color to the question. For instance:

    • The highest rate that you’ll pay in federal income taxes on your benefits is 31.45%. That rate applies if you’re in the top 37% income tax bracket, and the maximum 85% of benefits gets included as taxable income.
    • It’s common for seniors who have incomes that are not too far above the thresholds to be in the 12% tax bracket. So that would work out to a 6% tax rate if 50% of your benefits is subject to tax, or a 10.2% tax rate if 85% of your benefits gets taxed.
    • Those with incomes in between can expect to have the majority of their benefits subject to tax. That assumption produces tax rates that range from 11% for those in the 22% bracket who have half their Social Security subject to tax, to 29.75% for those in the 35% bracket with 85% of their benefits taxed.

    Those numbers are rarely going to be exactly the same for you, but they should give you a sense of where you’re likely to land in your own tax situation.

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    Start Your Plan Today

    Given the time frame involved — 35 years of earnings and an eight-year window to start collecting — getting the most from Social Security takes advanced planning. No matter where you are on your retirement journey, you’ll never again have more time before you retire than you do right now. So start getting your plans in place today, to give yourself your best chance of getting close to that maximum Social Security benefit.


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    How Is The Social Security Cola Calculated Each Year

    The short version of this answer is that the annual Social Security COLA is based on the Consumer Price Index for Urban Wage Earners and Clerical Works from the prior year’s third quarter.

    The 2023 COLA is based on the CPI-W from the third quarter of 2022. The cost-of-living increases are rounded to the nearest one-tenth of 1%. Looking back, the CPI for August was 8.3%, while the CPI for July was 9.1%.

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    How To Minimize Taxes On Your Social Security

    If your Social Security benefit is relatively fixed, albeit with small annual increases, you really have only two avenues left to get into that tax-free zone: reducing tax-exempt interest or adjusted gross income. And since most people dont have tax-exempt interest, youre left with one option.

    Therefore, the secret is to reduce your adjusted gross income in order to prevent provisional income from triggering a tax on Social Security, says Kelly Crane, president and chief investment officer at Napa Valley Wealth Management in St. Helena, California.

    Here are a few ways to reduce your adjusted gross income to get into the tax-free zone:

    You May Be Eligible For A Tax Credit

    How Social Security benefits are calculated on a $50,000 salary

    If you are receiving social security benefits only and you do not have a job, you may qualify for the Federal Earned Income Tax Credit. You can check if you qualify by visiting the EITC for SSN filers web page. Click on Question 2 to see if you are eligible.

    This tax credit applies to all Social Security benefits that are included in your adjusted gross income. It does not apply to Survivor Benefits, Disability Credit, or Retirement Credit benefits. To claim this credit, you must include your Social Security benefits on a Schedule A, part B, or C of your federal tax return.

    You may also be eligible for a tax credit if you have an ITIN from a state that offers it. This tax credit is meant to help taxpayers with low and moderate-income status reduce their federal tax liability. To qualify for the credit, you must file a tax return each year, and you may receive a refund.

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    Social Security Tax Limits

    The government bases the annual Social Security tax limits on changes in the National Wage Index , which tends to increase every year. The changes are intended to keep Social Security benefits on track with current inflation.

    Any income you earn beyond the wage cap amount is not subject to a 6.2% Social Security payroll tax. For example, an employee who earns $165,000 in 2022 will pay $9,114 in Social Security taxes .

    Keep in mind, however, that there is no wage base limit for Medicare tax. While the employee is only subject to Social Security tax on the first $147,00, they will have to pay 1.45% Medicare tax on the entire $165,000. Workers who earn more than $200,000 in 2022 are also subject to an 0.9% additional Medicare tax.

    The combination of the increase in the Social Security tax limit and the additional Medicare tax for high-earners could result in lower take-home pay. Unfortunately, that means workers who earned over $200,000 in 2021 are at risk of owing more taxes in 2022.

    Here is an example of how the Social Security limit works in 2021 and 2022:

    Social Security Tax Limit Example
    2021 Income

    Know The Earnings Limits

    Those hoping to work in retirement need to be especially careful if they’re planning to claim Social Security benefits early. Even if youâre just working part-time, itâs important to consider how that continuing income will affect your benefits.

    The SSA caps how much you are allowed to earn if you start taking your benefits before full retirement age, which is 66 for most baby boomers. For the most recent annual earned income cap, view the current annual contribution limits. For every $2 you earn over the limit, the SSA withholds $1 off the top of your benefits. Once you reach the year that you’ll turn full retirement age, the earned income cap goes up, and for every $3 you go over, itâs a $1 withholding during the months until your birthday.

    There is some good news, however: Because the penalty is determined by your individual earned income, if you retire early but your spouse doesn’t, your spouse’s earned income will not be factored into the earnings limit. Additionally, when you reach your full retirement age, the earnings limit disappears and Social Security will recalculate your benefit amount if you were negatively impacted by the earnings limit.

    Keep in mind, if you file your tax return jointly, your spouse’s earnings will be included when calculating your combined income for purposes of determining the taxation of your benefits.â1

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