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The TRUTH About Social Security Taxation: How It Actually Works · Retirement Answers

• 0:00
  Jacob: Hey, friends, and welcome back to another episode of Retirement Answers. My name is Jacob Duke. I am your host, as always. This week on the show, I'm going to share with you the truth about Social Security taxation and how it actually works, because Social Security is on the top of every retiree's mind. But more specifically, the question of will my Social Security benefits actually be taxed?
• 0:21
  That always comes up in the conversations I have as a retirement planner because the thought in people's minds that are receiving Social Security is, wait, you're telling me that I paid tax on my income while I was working to even get my benefits and now I'm being taxed again whenever I receive my benefits? That could definitely be frustrating. And in fact, President-elect Donald Trump has spoken on this topic some even mentioned trying to eliminate taxes on Social Security benefits. Now, time will tell if that's actually possible or something that could be realistic, but I think that all retirees would agree that not being taxed on their Social Security benefits would be great. Now, this leads me to this question.
• 0:58
  Are you actually paying taxes on your Social Security benefits? And the reason that I asked that question is because you might not be. See, Social Security is not taxed the same way as normal income. So we're gonna talk about this here throughout this episode, we're gonna break this down so it makes it easy for you to understand. But just because you're receiving benefits does not mean that you're gonna be paying tax on them because of how Social Security taxes are calculated.
• 1:21
  So we're gonna walk through this together and we're gonna see how this really works. Works. And my goal today is to simplify this as much as possible for you. So I'm gonna explain it, kind of how it works, and then we're gonna walk through a few different examples to help provide some context and create some clarity for you. Okay, so the first thing you have to do is you've got to figure out how much of your Social Security benefits are actually subject to taxation, and then we can take that amount and add it back to your income total, so we can really figure out how much your total tax is on your income.
• 1:53
  So how do we do this? Well, the first step is we have to find what's called your combined income. It's a quick little math equation. It's really not that hard, but the first thing is, is you are gonna take one half of your Social Security benefits. So that's the first number you gotta get.
• 2:08
  So take one half of how much you get from Social Security. Now you need to add your other income to it. So if you've got some sort of pension or IRA distributions, or perhaps some sort of income from working, if you have any other taxable income that's coming to you, that's the second number. So add all those different income sources up, and that's your second number. And the final number is any tax free income that you could have.
• 2:32
  For example, it could be from like a municipal bond or something like that. So not many people have that tax free income, to be honest with you, but some people do. And just know for calculating Social Security taxes, you do actually have to factor in your tax free income to this equation, even though you will not be paying tax on it on your tax returns. So three numbers, 50% of your Social Security benefits, any other taxable income you have, and then any tax free income you have. So that's your what we call your combined income.
• 2:59
  That's the first number we've got to figure out. Now, the second step is to take your combined income, which you just found, and run it through the specific Social Security income tax brackets. Now, are not your normal income tax brackets, and they're only used whenever you're trying to calculate your Social Security taxation. And the point of even running your combined income through these brackets that I'm about to tell you is to figure out how much of your Social Security is taxable. So what are the brackets?
• 3:29
  Well, they're different for single people versus married filing jointly. So for single folks, the first $25,000 of your combined income, 0% of that is taxable. Now, the range from 25,000 to 34,000, so think of it as like the next 9,000 of your combined income, half of that amount is subject to taxation. And any part of your combined income that is above 34,000, 85% of that amount is taxable. So that's just the single filers, and I'll tell you The Joint in just a second.
• 4:01
  But before I do, just know this, whenever it comes to Social Security taxation, the highest amount of your Social Security benefits that can be taxed is 85% of that amount. So under no circumstances would 100% of your benefits be taxable. At most 85% of your Social Security benefits would ever be taxable. So that was the single filers brackets. Now, what about the married filing jointly folks?
• 4:26
  So the first zero to 32,000 of your provisional or your combined income, that is 0% of that amount is taxable married filing jointly. So instead of 25,000, it's 32,000. Now, the range from 32,000 to 44,000, that particular amount, that $12,000 in that range, half of that is taxable, and then anything greater than $44,000 is going to be up to 85% of that amount is taxable. So depending on your marital status, you will use the appropriate brackets for you. Now, you don't have to remember all those numbers.
• 5:01
  Okay, just know I've got a handout, a document I can send you with these updated numbers, and I'm gonna send you the one for 2025 because it's gonna give you all these other important numbers to know as well, such as new tax brackets, standard deductions, capital gain brackets, all these different things that could be applicable to you and decisions you have to make every single year around your tax situation and your income. So I can send you that. And it also includes obviously those provisional or combined income brackets as well. So if you want that document, just shoot me an email saying, hey, I'd love to have the important numbers twenty twenty five document to shoot that to me and I'll send it over to you right away. That way you can use that for your own convenience and benefit.
• 5:39
  So that's the second step. We've got to take our combined income and run it through the brackets that we need to in order to figure out how much of our Social Security income is taxable. And then the third step is to take that amount, how much of our social security is taxable, and then add it back to our other taxable income. So if we had other IRA distributions, or income from working, or something like that, we take that total that we had, and then now also take this amount of our social security that we know is taxable, add those two together, and that is our true adjusted gross income. That's the number that's going to show up on your ten forty whenever you run it through the brackets and you figure out what your total tax is.
• 6:19
  So first step, we've got to find our combined income. Second step, run it through the Social Security income brackets to figure out how much of our Social Security is taxable. And then third, we have to take our taxable Social Security amount, add it back to our other income, and then we can move forward with the tax calculation on our tax return. So that's the process, and that's probably still clear as mud, and you might have to run back and listen to that again. But let's go ahead and look at some examples where we can add some numbers to this and really provide some color and detail to where it probably makes more sense for you.
• 6:50
  Okay. So here's the details of our situation. We're gonna say that our Social Security benefit for single Susie, so it's a single person we're gonna use today in this example, is $30,000. So her Social Security benefit is $30,000, which is about $2,500 per month. She also has a pension of $5,000 annually, and then also has made IRA withdrawals of $12,000.
• 7:15
  So what that does is that creates a total income of $47,000 that single Susie is actually getting. Okay, so now that we know her total income and kind of the different sources, we can figure out how much of her Social Security, how much of that $30,000 is truly taxable. So here's what we got to do. The first step, remember, is to figure out what the combined income is. So again, we take one half of the social security amount.
• 7:41
  So in her situation, that is 30,000, we take one half of that, so that's 15,000. And then also, she had two other sources of income that are taxable, which is going to be her pension of $5,000 every year, and then in her IRA withdrawals, which are $12,000 every year. So that's a total of $17,000 between those other two sources. So if we take 15, which is one half of her Social Security amount, we add 17 from her other sources, that equals $32,000. Okay.
• 8:10
  So her combined income is $32,000. Okay. So that's the first step. We gotta figure out what that number is now that we have it. We can then take it and run it through those brackets that I mentioned just a moment ago.
• 8:21
  So since she is single, the first bracket is zero to 25,000, the second is from 25,000 to 34,000, and then anything above $34,000 is that final bracket. So let's do this math really quickly. We've got $32,000 that's her combined income. If we take out the first 25,000, which again, none of that amount is actually subject to taxation, that leaves us with $7,000 left over. Now that $7,000, all of that amount fits within that second bracket, that 25,000 to $34,000 range, and any dollars that are in that range, half of that amount is subject to taxation.
• 8:59
  So if 7,000 is the amount that is left over after we subtract out the first bracket, which was 25,000, that means that 7,000 divided by two is a $3,500. So here's what that means. $3,500 is how much of her Social Security income is taxable, which means she's gonna get $30,000 of benefits, but only $3,500 is actually subject to taxation. Okay? So that's the second step, and that's a really big deal.
• 9:27
  And I hope you kind of understand how how big that is, that you can get $30,000 of income and technically you're paying tax on only 3,500. Okay, so that's the second step. We figured out how much of her Social Security is taxable, and then we take that amount and we can add it back to her other income sources, her pension and her IRA withdrawals to figure out what her true adjusted gross income is. So $3,500, that's how much of her Social Security benefits that are taxable. We add that to the $5,000 pension and then also the $12,000 IRA withdrawals.
• 9:59
  So what we've got then is a total adjusted gross income of $20,500. Now, that's compared to her total income of $47,000, and what you're starting to see here is that even though she has $30,000 of social security income, that's gonna be helpful for her because only again, 3,500 is actually subject to taxation, which means her total adjusted gross income is a lot lower than you otherwise would think. Now, whenever we keep following this pattern, the next step is to figure out how much of that $20,500 of AGI is actually taxable. Well, if we look at a standard deduction and Susie is above 65, so in 2024, her standard deduction as a single person being over 65 is $16,550. So whenever we do the math on that, 20,500 minus that $16,005.50, her total taxable income is $3,950.
• 10:55
  So yes, you heard that right. She went from a total income that she's receiving of $47,000 down to a taxable income of only $3,950, which at 10% at the federal level results in a total tax of $395. So that's very little tax to be paid on that amount of money, 47,000 and only $395 in taxes. And that's all because of how Social Security taxation works. It's a huge benefit to have Social Security income if you don't have other large amounts of other taxable income.
• 11:28
  So if we take this kind of scenario we just went through, one of the questions that could be in our mind here is is well, Jacob, if we aren't filling up that 10% bracket, which in 2024 is $11,600 for single filers, and we only had a taxable income of $39.50, that means we have some room there in order to be able to fill up that 10% bracket, which I think we'd all agree is a fairly low tax rate, and we kind of want to fill that 10% bracket up. So Susie, here she might be able to take money out of her IRA right at that 10% rate. So at first glance, if we look at the total, the top of that 10% bracket is $11,600 and her income right now as it stands today with the current figures we have is, her total taxable income is $3,950. The difference there is $7,650, and that's how much room she has at the 10% bracket that she can pull from her IRA at that 10% rate. Now on the surface, that might be what we think is true, but I'm about to show you why that's not exactly correct.
• 12:33
  And it's actually something you need to pay attention to if you're trying to fill up a certain tax bracket and you have Social Security income that's at play. So let's walk through the second scenario here and see how an increase in your other incomes outside of your Social Security could be a negative impact on your Social Security taxation. Okay, so what we've got now is we're going to keep the Social Security amount the same of $30,000 we're gonna keep the pension the same of 5,000, but we're actually gonna take out that additional $7,650. We're gonna take that out of her IRA. So we're gonna increase the IRA withdrawals from $12,000 to $19,006.50 every year.
• 13:11
  So what this does is that increases the total income from 47,000 to $54,006.50. So we've increased her income by what we think just on the surface, I know this isn't true, but we're just kind of running down, you know, a thought pattern here. What we think is going to fill up the 10% bracket. So we've increased her IRA withdrawals to help fill in that 10% bracket. So if we go through those steps again, so we figure out what the combined income is, let's do that really quickly.
• 13:36
  We take half of the Social Security amount. So again, it's $30,000, which means 15,000 gets added into the combined income for the Social Security portion. We also have 5,000 for the pension, and now we have $19,006.50 for her IRA distributions. That total amount when you add all this together is now $39,006.50. Now before it was $32,000.
• 14:00
  So we've increased it by that $7,006.50. Now we take that amount again, we run that through the single filer brackets to figure out how much of her Social Security is taxable. What we've got there is we come out the other side with actually some of it being at the 85% bracket. So the first 25,000, none of that is subject to taxation. The next 9,000, so the portion from 25 to 34,000, half of that is subject to taxation.
• 14:24
  And when we do the math on that, we know that we have $39,650 which is greater than 34,000. So that means we have $5,650 that 85% of that amount is subject to taxation. So if we take 50% of the 9,000, the range from 25,000 to 32, half of that amount is subject to taxation, so that equals 4,500, and then 85% of 5,650, we add those two numbers together, that gives us a total amount of Social Security that is now subject to taxation of $9,302. Now, if you compare this with what we had before, it was only 3,950. So we've almost tripled what we had before because of this increase in our IRA withdrawals.
• 15:11
  We have a higher combined income amount, and now because of that higher combined income, we have more of our Social Security now being taxed. That's really interesting. So keep following me here. Now we have to figure out the adjustable gross income. So we know how much of our Social Security is taxable, it's $9,302 We also know there are other sources of income, right?
• 15:33
  So we take that 9,000, we add that to 5,000, and then also our new IRA distribution amount, which is 19,650, that creates a total adjusted gross income of $33,009.52. Again, before that was not the case, it was only 20,500. So it's over $13,000 more of AGI because of a $7,650 increase of our income. Again, you following me here? Because you have other incomes, your Social Security tax will be increased.
• 16:07
  So we take our new AGI of 33,952, we subtract out the standard deduction, again, she's over 65, so in 2024, her standard deduction is 16,550. Her total taxable income comes out to $17,004.00 2. Before, it was $3,009.50. So if we run that $17,004.00 2 through the first 10% bracket as a single filer, there's leftover money of about 5 of $5,802, that would be at 12%. And if we kind of run the math really quickly on that, that comes out to a total tax of $1,856 compared to before where it was $395.
• 16:46
  So what happens here is is the total tax to be paid went up by $1,461, which is a huge increase. And what that means is is the tax rate on the additional $7,650 we took out of her IRA, that's going to be 19%. And you're right thinking, Jacob, they're at the 10% and the 12% bracket, how could they get taxed 19% on that money? Well, they're not getting taxed only on that money, they're getting taxed on the additional amount of Social Security that is now subject to taxation, which if I remind you about, it was a $3,950 before and now with this $7,000 increase in our income, her Social Security that is subject to taxation is now 900302. So again, that amount almost tripled.
• 17:32
  So technically, what's happening here, the effective tax rate is getting increased on the new dollars coming in from the IRA because more Social Security is becoming taxable with every additional dollar of income. So this is what's called the Social Security Tax Torpedo, which basically just means the more income you have, the higher amount of your Social Security will be taxed, which means all the new dollars that you'd be taking in, that is gonna be subject to a higher tax rate because of this. And this is just something that's really not thought about by most retirees nor known at all. It's kind of like a, oh, I'm paying tax on 85% of my Social Security and I don't like it. It's like, well, you may or may not be paying tax on 85% of your income, because what you've got to factor in is your other sources of income, the things outside of Social Security that would determine how much of your Social Security is truly taxable.
• 18:21
  Now, one now, one really cool thing that I want to tell you about is if your Social Security is your only source of income, then you're not going to pay any tax on that Social Security amount. It doesn't matter how much you have coming in, whether you're single, you're married filing jointly, if your only source of income between you or you and a spouse is your Social Security incomes, you're not going pay any tax on any of it. I wanted to run through an example just to prove that to you. So what I've got is, I've got the highest benefit amount here in 2024, which is $4,873 a month. So the highest possible Social Security benefit in 2024 is $4,873.
• 19:02
  Now it increases slightly every year, but that comes out to this year, a total annual amount of $58,476 Now, if we want to play this out, which we're about to, I'm going to say that there's no pension income, there's no IRA withdrawals, there's no there's nothing else coming in. The only type of income that this person has is going to be 58,476. Okay, so let's run through the process really quickly one more time. We've got to find the combined income, which again is one half of your Social Security amount plus other sources of income. So in her situation, in this example, we've got, half of $58.04 70 6, which comes out to $29.02 38.
• 19:41
  So $29,238, she has no other income sources. There's nothing to add to that. So it stays the same. That's the true combined income. When we run that through the Social Security brackets, remember the first $25,000 is a single person, none of that is subject to taxation.
• 19:59
  The next 9,000 or whatever falls in that category would be. So she only has $4,238 in that particular bracket, and half of that amount is 2,119. Okay. So that's how much of her Social Security is taxable. Again, since she has no other income, that's going to be her total AGI as well, and then her standard deduction is the same at $16,005.50, which means she's not going to pay any tax on any of that Social Security amount.
• 20:26
  So here's the big takeaway. Your Social Security may or may not be taxable. It depends on your other income. If your only source of income is your Social Security, you're not paying any tax on any of it. I just proved that to you with the math that I just did.
• 20:39
  So tell that to a friend who might be worried about how much they're paying on taxes around their Social Security. If their only source of income is Social Security, what that means is, is they are not going to pay any tax on that amount. Now why this is important is because you've got to understand how this works, so that whenever the question of well, how much should I pull out of my IRA comes up, you've got to be able to back into how much you should pull based on how this calculation works. So, it was important here is knowing how it works so that you can make the best decision for you around where your income comes from. But another important thing I want to tell you about is tax diversification.
• 21:15
  And I've talked about this in some of my other episodes, but having different sources of income from different, you know, taxable account types, what you've got is the ability to spread out your income across these different accounts and kind of manage and control where your income comes from. Therefore, you can control how much tax you pay in total, but also how much tax you pay on Social Security. So for example, if you need $30,000 out of your accounts to live that year, and all of that has to come from your IRA, what that would do is that could push your Social Security taxation to a higher level because you have this other new additional taxable income. But let's say you still need $30,000, but half of it can come from your IRA and half of it can come from, you know, your brokerage account or your Roth IRA. What that does then is now you only have to pay tax on the 15,000, and you might have some capital gains on the brokerage side, but let's just say that you don't, or it's cash.
• 22:08
  What you can do is you have 15,000 from the IRA and the other 15,000 you have to live on, that's not taxable, which means it's not getting included in how much of your Social Security income is subject to taxation. So it's important to know these things as you kind of evaluate, you know, where do I pull income from and just really how Social Security taxation works, you know, truly. There's a lot of confusion around it, and hopefully this gives you a better understanding of how this really works. And if you want more detail on it, I'm actually gonna be putting out a YouTube video here soon to kind of visually show you what this looks like. Maybe if you're a visual learner, I know this is hard to communicate over audio, go check out and subscribe to my YouTube channel so that you don't miss that video when it comes out.
• 22:46
  Also, don't forget to email me about that that handout with all those important numbers for you for 2025. I'll send that over to you. Shoot me an email, it should be down in the description below, and I'll happily send that over to you. So with that, I hope, this has been helpful. Again, share it with a friend if they could benefit from it.
• 23:01
  But I hope you have a great week, and I will see you next time.