Are Social Security Benefits Taxed? Find Out if Your Income Faces Federal and State Taxes
Retirees in certain states can enjoy the absence of state taxes but should remain mindful of the federal tax regulations.
As of early September, about 54 million Americans were receiving Social Security retirement benefits. For many, this program serves as their primary source of retirement income, positioning it as one of the key social programs in the nation.
While there are many valid criticisms of Social Security, its role as a financial safety net for countless individuals should not go unappreciated.
Yet, similar to other income types, Social Security benefits are also subject to taxation. Fortunately, there are pros and cons for retirees to consider. Let’s examine both sides.
Most retirees are exempt from state taxes on Social Security
The bright side is that the majority of states do not tax Social Security benefits. Here are 41 states (including Washington, D.C.) that currently have no taxes on these benefits:
- Alabama
- Alaska
- Arizona
- Arkansas
- California
- Delaware
- Florida
- Georgia
- Hawaii
- Idaho
- Illinois
- Indiana
- Iowa
- Kansas
- Kentucky
- Louisiana
- Maine
- Maryland
- Massachusetts
- Michigan
- Mississippi
- Missouri
- Nebraska
- Nevada
- New Hampshire
- New Jersey
- New York
- North Carolina
- North Dakota
- Ohio
- Oklahoma
- Oregon
- Pennsylvania
- South Carolina
- South Dakota
- Tennessee
- Texas
- Virginia
- Washington
- Wisconsin
- Wyoming
It’s important to note that tax laws regarding Social Security can change, so if you reside in one of the nine states that currently impose taxes on benefits, make sure to stay updated on your state’s regulations as they can shift. In fact, three states (Missouri, Nebraska, and Kansas) eliminated their Social Security tax just in 2024.
On the downside, federal taxes still apply
<pNow, for some less favorable news: regardless of what your state’s tax laws say, federal tax regulations apply universally. The IRS determines your tax responsibilities based on your “combined income,” which consist of the following:
- Adjusted gross income (AGI): Your total income from all sources apart from Social Security.
- Nontaxable interest: Income from interest that isn’t taxable under federal law, like that from U.S. Treasury or municipal bonds.
- Half of your Social Security benefits: Represents 50% of your total Social Security benefits for that year.
After calculating your combined income, Social Security applies specific guidelines to determine the taxable portion of your benefits.
Understanding federal Social Security taxes
The federal tax rules regarding Social Security can be somewhat complex, which might not be preferred by many, so let’s clarify how they operate.
At first glance, one may conclude that Social Security benefits could be taxed up to 85%. Fortunately, that’s not the case. These percentages do not indicate how much of your benefits will be taxed, only the portion that is eligible for taxation.
Let’s illustrate this with a scenario where you are married and filing jointly, and the following holds true:
- Your combined AGI with your spouse is $36,000
- You earned $1,000 from Treasury bond interest
- Your total Social Security benefits for the year are $24,000
In this example, your combined income totals $49,000 ($36,000 + $1,000 + $12,000). Consequently, up to 85% of your Social Security benefits for the year ($20,400) are eligible for taxation.
Social Security would take the $20,400, add it to any other income you may have, and tax it at your applicable income tax rate. If you’re in the 22% tax bracket, you would owe $4,488 on the $24,000 received in benefits for that year, which not only is better than being taxed on $20,400 but also offers a clearer understanding of your tax liability.
The clearer your comprehension of how Social Security taxes function, the more effectively you can organize your retirement finances.
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