Anyone who contributes to Social Security and is expecting a benefit may wonder, “is my Social Security going to be taxable?” The short answer is – it depends. While most people automatically assume they’ll owe taxes on Social Security income, that’s not necessarily true.
How Social Security is Taxed
The IRS doesn’t tax Social Security benefits directly. Instead, they look at your provisional income to determine whether (and how much of) your benefits are taxable.
What Is Provisional Income?
Provisional income is calculated as:
Adjusted Gross Income (AGI)
+ Tax-exempt interest (like municipal bonds)
+ 50% of your Social Security benefitsDepending on your filing status and provisional income, up to 85% of your Social Security could be taxed:
| Filing Status | 0% Taxed If Below | 50% Taxed If Between | 85% Taxed If Above |
|---|---|---|---|
| Single | $25,000 | $25,000 – $34,000 | $34,000 |
| Married Filing Joint | $32,000 | $32,000 – $44,000 | $44,000 |
If your only income is Social Security, it’s very likely you won’t owe any federal income tax. But since most retirees supplement Social Security with income other sources such as withdrawals from 401(k)s, IRAs, rental income, etc., it’s the provisional income that creates the taxable event.
That’s when your Social Security may become taxable.
Example: When Social Security Isn’t Taxed
Let’s say you’re a married couple over 65 with the following combined retirement income:
- $30,000 in Social Security benefits
- $20,000 withdrawn from a Roth IRA
- $10,000 from a cash value life insurance policy
Provisional income =
- Roth IRA: $0
- Life insurance loan: $0
- 50% of SS: $15,000
- Total: $15,000 (well below the $32,000 threshold)
Result: Your Social Security is not taxed and you owe no federal income tax — thanks to tax-free income sources and the standard deduction.
Example: When Social Security IS Taxed
Let’s say you’re a married couple over 65 with the following combined retirement income:
Provisional income =
- Traditional IRA withdrawal: $25,000
- Part-time job income: $10,000
- 50% of SS: $15,000
- Total: $50,000 (well above the $44,000 threshold for married couples filing jointly)
Result: Up to 85% of your Social Security is taxed, and you will owe federal income taxes on both your Social Security and your other sources of income.
This is a common scenario for retirees who haven’t done proactive tax planning. But the good news is, you can plan ahead to reduce this burden.
The “Power of Zero” Strategy
David McKnight is the author of the “Power of Zero” which is a strategy which encourages pre-retirees to reposition their money so they can draw income from tax-free sources in retirement, resulting in Zero taxes.
The goal? Stay in the 0% tax bracket by:
- Converting traditional IRAs/401(k)s to Roth IRAs (strategically)
- Using Indexed Universal Life (IUL) for tax-free retirement income
- Leveraging Health Savings Accounts (HSAs) for medical expenses
When executed properly, this strategy can help you:
- Avoid paying taxes on your Social Security
- Minimize overall tax liability in retirement
- Protect against possibility of future tax increases
Are Lawmakers Trying to Eliminate Social Security Taxes?
Yes, multiple bills have been introduced to eliminate taxes on Social Security altogether. However, none have passed into law yet.
Currently, the IRS collects billions in revenue from Social Security taxes, making it unlikely to be repealed without other budget adjustments. Until that happens, your best bet is to plan proactively.
You can stay updated on proposed Social Security tax changes via the Congress.gov website.
Final Thoughts
Most retirees are shocked to learn that up to 85% of their Social Security can be taxed — but with proper planning, it’s possible to reduce or even eliminate that tax burden. And even though the lowest tax bracket is 10%, it is entirely possible to pay 0% taxes.
At Brightside Financial, we specialize in helping professionals and small business owners to set themselves up for a tax-efficient retirement. We’ll help you understand where you are today, and design a plan to get you where you want to be — including how to keep more of your money in your pocket, no matter how high taxes go up.
Want to find out if you’re on track for a tax-free retirement? Schedule a free strategy call today.
Disclaimer: This article is for educational purposes only and is not intended to be tax or investment advice. Always consult a qualified tax advisor or financial professional regarding your unique situation.
For related articles from Brightside Financial https://getonthebrightside.com/how-to-legally-reduce-taxes/
