How Much Can I Make Before My Social Security Is Taxed?

Social Security benefits provide income for retirees, but many are surprised to learn these payments can be taxed. Whether taxes apply depends on total income from various sources. Understanding income thresholds and how earnings impact taxation is crucial for financial planning in retirement.

Federal Guidelines for Taxing Benefits

The federal government taxes Social Security benefits under a formula established in the 1983 amendments to the Social Security Act. The IRS determines taxability by evaluating a recipient’s total income, not just Social Security payments. This approach ensures higher-income beneficiaries contribute taxes on their benefits, similar to other retirement income.

Under the Internal Revenue Code, a portion of benefits becomes taxable when income exceeds certain limits. The IRS considers Social Security benefits alongside other earnings, preventing lower-income retirees from facing undue tax burdens while ensuring those with additional income sources pay taxes on a portion of their benefits.

The percentage of benefits subject to taxation varies. Some recipients owe no taxes, while others may see up to 85% of their benefits included in taxable income. The IRS applies a tiered system, taxing only income exceeding specific thresholds to maintain a progressive structure that affects higher earners more.

Combined Income Calculation

The IRS determines Social Security benefit taxation based on “combined income,” which includes adjusted gross income (AGI), nontaxable interest, and half of Social Security benefits. Understanding how different income sources contribute to this calculation helps estimate potential tax liability.

Wages and Self-Employment

Earnings from employment or self-employment are included in combined income and can significantly impact taxation. Wages from a job, reported on a W-2, and net earnings from self-employment, reported on a Schedule C (Form 1040), both count toward AGI.

For self-employed individuals, net earnings are calculated after deducting business expenses. The IRS applies a self-employment tax (SE tax), which consists of Social Security and Medicare taxes. In 2024, the SE tax rate is 15.3%, with 12.4% allocated to Social Security and 2.9% to Medicare. Half of this tax is deductible when calculating AGI, reducing taxable income.

For example, if a retiree earns $20,000 from part-time work and receives $18,000 in Social Security benefits, their combined income would be:

20,000 + (18,000 × 0.5) = 29,000

If this amount exceeds IRS thresholds, a portion of Social Security benefits may be taxable.

Investments

Investment income, such as interest, dividends, and capital gains, also contributes to combined income. Taxable interest from savings accounts, bonds, and certificates of deposit (CDs) is included in AGI. Tax-exempt interest from municipal bonds, though not subject to federal income tax, is still factored into the combined income calculation.

Dividends are categorized as either qualified or ordinary. Qualified dividends, taxed at long-term capital gains rates (0%, 15%, or 20% depending on taxable income), are included in AGI. Ordinary dividends, taxed as regular income, also contribute to AGI.

Capital gains from selling stocks, real estate, or other investments further impact combined income. Short-term capital gains (assets held for one year or less) are taxed as ordinary income, while long-term capital gains receive preferential tax treatment. If a retiree sells an investment for a profit, the gain increases AGI, potentially pushing combined income above the taxation threshold for Social Security benefits.

For example, if a retiree earns $5,000 in qualified dividends and $10,000 in long-term capital gains, their AGI increases by $15,000, which could result in a higher portion of Social Security benefits being taxed.

Retirement Accounts

Withdrawals from retirement accounts, such as traditional IRAs and 401(k) plans, are included in AGI and affect combined income. Distributions from these accounts are taxed as ordinary income because contributions were made pre-tax. Required Minimum Distributions (RMDs), which begin at age 73 in 2024 under the SECURE 2.0 Act, must be taken annually, increasing taxable income.

Roth IRAs, however, do not impact combined income if withdrawals are qualified. Since contributions to Roth IRAs are made with after-tax dollars, qualified distributions (after age 59½ and meeting the five-year rule) are tax-free and do not count toward AGI. This makes Roth IRAs a strategic tool for managing Social Security taxation.

For example, if a retiree withdraws $25,000 from a traditional IRA, this amount is added to AGI, increasing combined income. If they instead withdraw the same amount from a Roth IRA, their combined income remains unchanged, potentially reducing or eliminating Social Security taxation.

Thresholds for Taxation

The IRS applies specific income thresholds to determine whether Social Security benefits are taxable. These limits have remained unchanged since the tax on benefits was introduced, meaning their impact has grown as incomes have risen over time. Unlike other tax brackets, these thresholds are not adjusted for inflation, resulting in more retirees becoming subject to taxation each year.

For individuals, Social Security benefits become taxable when combined income exceeds $25,000. Up to 50% of benefits are taxable for income between $25,000 and $34,000, and beyond $34,000, up to 85% of benefits may be included in taxable income. For married couples filing jointly, the first threshold is $32,000, with the 50% rate applying up to $44,000, after which the 85% rate takes effect.

These income levels determine how much of the benefits are considered taxable, not the tax rate applied to them. The actual tax owed depends on the taxpayer’s marginal income tax bracket.

Because these thresholds are fixed, even modest increases in income can lead to a higher percentage of benefits being taxed. This is sometimes referred to as the “tax torpedo,” where retirees experience a steep rise in their effective tax rate as more of their Social Security benefits become taxable. This effect is particularly pronounced for those withdrawing from tax-deferred accounts, as each additional dollar of income can cause another portion of benefits to be included in taxable income.

Filing Status Considerations

How Social Security benefits are taxed depends on income and filing status, which determines the income thresholds applied.

For married taxpayers who file separately but live together at any point during the year, the IRS applies the most restrictive rules. Unlike other filers, they are subject to an effective threshold of $0, meaning that up to 85% of their Social Security benefits can be taxable regardless of their income level. However, if the spouses have lived apart for the entire tax year and meet specific IRS criteria, they may be able to file separately without triggering this harsher taxation.

Head of household filers, who must be unmarried or considered unmarried under IRS rules and have a qualifying dependent, follow the same thresholds as single filers. This status can provide additional tax benefits, such as a higher standard deduction, which may offset some of the taxable portion of Social Security benefits.

Withholding and Reporting

Managing the taxation of Social Security benefits requires careful planning, particularly regarding withholding and reporting. Some retirees prefer to pay any taxes owed when filing their annual return, while others opt to have federal taxes withheld from their benefits to avoid a large tax bill.

The Social Security Administration (SSA) allows recipients to request federal tax withholding by submitting Form W-4V (Voluntary Withholding Request). Unlike wages, where withholding is based on income brackets, Social Security withholding is available only at fixed rates of 7%, 10%, 12%, or 22%. Beneficiaries must select one of these percentages, as there is no option to specify a custom amount. Those who expect to owe taxes but do not want withholding can instead make estimated quarterly tax payments using Form 1040-ES.

When filing a tax return, recipients report their total benefits on Form 1040 or 1040-SR (for seniors). The taxable portion is calculated using the IRS worksheet included in the instructions. If benefits were withheld for taxes, this amount is reported on Form SSA-1099, which the SSA issues each January. Proper tax planning, including adjusting withholding or estimated payments, can help retirees avoid unexpected tax liabilities and ensure compliance with IRS requirements.