Social Security benefits look different than they did a month ago, thanks to the latest cost-of-living adjustment (COLA). You may be sizing up how far your new, bigger check will buy each month — but you may have less available for spending than you think.
Not everyone knows this, but the government may tax some of your Social Security checks if your income is high enough. Many people may encounter this rule for the first time in 2023. Here’s how to know if you’ll be one of them.
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How the federal government taxes Social Security benefits
The government looks at your temporary income to determine whether to tax your Social Security benefits. This is your adjusted gross income (AGI), plus any tax-free interest you have from your investments and half of your annual Social Security benefits. For example, if you withdraw $40,000 from a 401(k), have no tax-free interest, and earn $20,000 from Social Security in 2023, your temporary income would be $50,000.
The government uses this information in conjunction with your tax-filing status to decide how much of your benefit will be taxed, as shown in the following table:
|
The percentage of your Social Security benefits that is taxable |
Single, head of household, qualifying widow(er), or married filing separately |
Married, filing jointly |
|---|---|---|
|
0% |
Temporary income below $25,000 |
Temporary income below $32,000 |
|
up to 50% |
Temporary income between $25,000 and $34,000 |
Provisional income is between $32,000 and $44,000 |
|
Up to 85% |
Temporary income exceeds $34,000 |
Temporary income exceeds $44,000 |
Data source: Social Security Administration. Chart by author.
To be clear, the table above doesn’t tell you how much of your check you owe back to the government — it only tells you what percentage is taxable. The actual amount you pay will depend, in part, on your income tax bracket for the year.
Continuing with our example above, if you’re a single adult with $50,000 in temporary income and $20,000 in annual Social Security benefits, the government can tax you up to $17,000 of those benefits. But the tax rate you pay depends on your tax bracket. These range from 10% to 37% depending on your taxable income and filing status.
The threshold for benefit taxation described above has not changed over the decades. As a result, more people owe them each year as the average Social Security check grows. This will probably happen in 2023, with an 8.7% advantage over last year.
Your state government may also offer tax benefits
In addition to federal benefit taxes, you may owe state taxes on your Social Security benefits if you live in any of the following places:
- Colorado
- Connecticut
- Kansas
- Minnesota
- Missouri
- montana
- Nebraska
- new mexico
- Rhode Island
- Utah
- Vermont
- West Virginia
But calling one of these states home isn’t a guarantee that you’ll lose more of your checks Each state has its own formula for determining who owes what debt, so you’ll need to investigate your state’s rules to see if this is a concern for you.
What to do about Social Security benefits taxes
When you know that Social Security benefits taxes are a possibility, you may be able to avoid them with the right strategies. If you have Roth savings, for example, you may rely more on these accounts if you’re near the upper taxation threshold. Roth accounts allow tax-free withdrawals in retirement, so they won’t affect your temporary income. You can try to reduce how much you withdraw from your tax-deferred retirement accounts.
But avoiding benefit tax is not always possible. If you think you owe, you should be prepared to incur additional taxes. You can deal with this at the end of the year when you file your tax return or request that the Social Security Administration withhold some tax from your Social Security checks throughout the year.
Even if you manage to avoid benefits tax in 2023, you may owe them in future years. So always keep an eye on your temporary income and pay attention to any changes in Social Security rules that might affect what you owe.