The landscape · Investing and taxes
Social Security taxation by combined income
Up to half of Social Security benefits become taxable once combined income passes a first line, and up to 85 percent above a second line, with the lines fixed in the law.
Who this exists for. This applies when a person receiving Social Security benefits has other income, including tax exempt interest, above a line written in law. Ticks that show it: I am 65 or older; I am 70 or older; I am 73 or older; I have an IRA or an old workplace plan.
How it works
Combined income is adjusted gross income without the benefits, plus tax exempt interest, plus half of the Social Security benefits for the year. For a single filer, benefits are tax free when combined income is under this year's official ss tax first threshold single (not yet verified here; see the official source below), up to 50 percent of them are taxable between that and this year's official ss tax second threshold single (not yet verified here; see the official source below), and up to 85 percent above the second line, with higher lines for a joint return and a line of zero for most married people filing separately. The percent is the share of benefits added to taxable income, not a tax rate. Because each extra dollar of other income can pull more benefits into taxable income, the effective rate on a withdrawal from an IRA in the middle range can be well above the bracket rate.
What it gives
At least 15 percent of benefits are never taxed, and for lower income retirees none are.
Roth withdrawals and qualified charitable distributions do not count in combined income.
The lines are simple enough to run on a single sheet of paper.
What it costs, or where the catch is
The lines were set decades ago and never move, so inflation pulls more retirees over them each year.
Tax exempt interest counts, which surprises holders of municipal bonds.
In the middle range, an IRA withdrawal can be taxed at the bracket rate plus the tax on the benefits it drags in.
A worked example
Lottie is single with $24,000 of Social Security and $20,000 of IRA withdrawals. Her combined income is $20,000 plus half of $24,000, which is $32,000. If the first line were $25,000 and the second $34,000, part of her benefits become taxable, up to 50 percent of the amount over the first line, which is 50 percent of $7,000, or $3,500, so $3,500 of her benefits are taxed. Taking $5,000 more from the IRA would push her past the second line and pull more benefits into income.
Where it goes wrong
The common miss is a retiree who draws a larger IRA withdrawal for a purchase and finds the tax bill is far larger than the bracket rate suggested, because the benefits were taxed too.
Who confirms it for you
For your own numbers, a CPA or enrolled agent. This page explains how the rule works for people in general; it does not know your situation and does not tell you what to do.
The official source
Social Security: Income taxes and your Social Security benefit. Every figure that changes by year comes from the site's rules table, which the watcher checks against the official page on a schedule; where a figure is not yet verified, this page says so instead of printing a number.
Ask about Social Security taxation by combined income
A model reads this page and answers from it. It will say when the answer is not on the page. Education, not personalized advice.
Nearby doors
- Leaving a job: the four things that can happen to the old plan
This applies when a worker leaves an employer and has a balance in that employer's retirement plan.
- The traditional IRA and the deduction phase out
This exists for anyone with earned income who opens an IRA on their own, and especially for a worker who also has a plan at work, since that changes whether the contribution is deductible.
- IRA catch up at 50
This applies when a person who contributes to a traditional or Roth IRA turns 50 during the year, which adds a catch up amount to the yearly cap.
- Roth conversions and the low income year
This exists for a person with pretax money in a traditional IRA or old workplace plan, and it matters most in a year when income is unusually low.
- The two Roth five year rules
This applies when a person holds a Roth IRA and takes money out, since two separate five year clocks decide whether earnings and converted amounts come out free of tax and penalty.
- The early withdrawal penalty and its exceptions
This applies when a person under 59 and a half takes money out of an IRA, since the withdrawal is taxed and usually carries a 10 percent addition unless one of the listed exceptions fits.
Education, not advice. Wealthy Habitat explains how rules work and never recommends what to do with your money. The No Advice Disclosure.