Are Social Security Benefits Tax-Free?

This is a trick question, because Social Security or SSI benefits can be both taxable and tax-free regarding federal and state taxes (depending on which state you live in).  Regarding federal taxes, the determinant for taxation is the total of applicable income according to the IRS using their formula called “combined income”, which includes Adjusted Gross Income but then adds tax-free bond interest and 50% of SSI.  If you are below $25k as a single filer and $32K as married filing jointly, your SSI will not be taxed. If your income is between $25K and $34k as a single filer and between $32K and $44k your SSI benefit will be 50% taxable.  If you earn above $34k as a single filer and $44k as a married filing jointly, your benefit will be 85% taxable and therefore 15% non-taxable. This means that there will always be a portion of your benefit that is federal tax-free.

Regarding state taxes, California is not included in the group of 13 states that currently tax SSI benefits. These states which mirror the federal tax schedule and include Minnesota, North Dakota, Vermont and West Virginia. The remaining 9 states (Montana, Colorado, New Mexico, Utah, Nebraska, Kansas, Missouri, Connecticut, and Rhode Island) have varying degrees of income exemption pertaining to the SSI benefit. Taxation of income is an important part of establishing a retirement income strategy. There are a myriad of other things to consider which I will be covering in future articles and in our workshop entitled Making the Most of Social Security – Retirement Enhancing-Income Strategies. Please feel free to call our office if you have any questions or if you are interested in attending our workshop. 

Sources

  • Social Security Administration - Benefits Planner: Income Taxes And Your Social Security Benefits

  • https://www.ssa.gov/planners/taxes.html

  • Article “These 13 States Tax Social Security Benefits “  by Sean Williams, Sept 17, 2016 The Motley Fool https://www.fool.com/retirement/2016/09/17/these-13-states-tax-social-security-benefits.aspx


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