Though it’s still the lazy days of August… the U.S. celebrated National Lazy Day on Aug. 10… Readers continue to ask us tax questions. One topic that pops up from time to time: Federal taxation of Social Security benefits. So we thought we would review the rules.
Some people aren’t taxed on their benefits. They include individuals for whom Social Security is the sole or primary source of gross income. Many others unfortunately could owe tax at ordinary income tax rates on up to 50% or 85% of Social Security benefits, depending on the amount of their provisional income. Provisional income is generally equal to the combined total of (1) tax-exempt interest, (2) 50% of your Social Security benefits and (3) other non-Social-Security income items that make up your adjusted gross income, minus certain deductions and exclusions.
For single filers: If provisional income is less than $25,000, then the benefits are tax-free. If provisional income is between $25,000 and $34,000, then up to 50% of benefits is taxable. If provisional income is over $34,000, up to 85% is taxed. For joint filers: If provisional income is less than $32,000, then the benefits are tax-free. If provisional income is between $32,000 and $44,000, then up to half of benefits is taxable. If provisional income is over $44,000, up to 85% is taxed. If you want federal income tax withheld, complete IRS Form W-4V to have 7%, 10%, 12% or 22% of your monthly Social Security benefits taken out.
Many tax breaks and income levels are indexed to inflation each year… But not the provisional income thresholds for taxing Social Security benefits. For decades, they have stayed static at $25,0000, $34,000, $32,000 and $44,000. Democrats have proposed bills over the years to raise the thresholds… But they never pass. That’s because the bills also include payroll tax hikes on upper-incomers. For example, in 2022 Dems proposed to increase the $25,000 and $32,000 income thresholds to $35,000 and $50,000. However, that same bill also had the 6.2% Social Security tax for employees and employers kick in again for high-income workers on wages over $400,000. For 2024, up to $168,600 of wages are hit with the 6.2% Social Security tax. The proposed payroll tax hike on upper-income individuals made the bill a nonstarter with Republicans.
Donald Trump wants to end federal taxation of Social Security benefits. On July 31, he posted on Truth Social, his social media platform, that “seniors should not pay tax on Social Security.” He didn’t elaborate on how he would do this.
Most states exempt Social Security benefits from state income tax. But not all. The outliers that tax all or part of the benefits are Colo., Conn., Minn., Mont., N.M., R.I., Utah and Vt. Most of these have exemptions based on income guidelines.