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Peacock & French CPAs
Jul 01, 2021

Contrary to what many people believe, Social Security income may actually be subject to federal taxes. But just how much of your SSI is taxable, and at what rate? Keep reading to find out more.

Many people are under the impression that Social Security income (SSI) is never taxed. However, this isn’t the case. While it is possible to not be taxed on your SSI, this is based on your total combined income, and it is very possible that at least a portion of that income will be subject to tax. Additionally, because SSI is not taxed prior to distribution, many retirees end up with large tax bills when they file their returns. If you’re receiving SSI for the first time this year, here’s what you need to know about how that income is taxed.

Amount of Your SSI that Is Subject to Tax

The portion of your Social Security income that’s subject to income tax is based on your total combined income—your SSI, along with any other income sources you might have, such as distributions from retirement accounts, investment or rental income, etc. The current thresholds for SSI taxes are as follows:

• Total income under $25,000 ($32,000 for couples) – No portion of SSI is taxed
• Total income between $25,000 and $34,000 ($32,000 and $44,000 for couples) – Up to 50% of SSI may be taxed
• Total income over $34,000 ($44,000 for couples) – Up to 85% of SSI can be subject to tax

Note that the percentages above are not your tax rate, but reflect how much of your SSI income will be considered taxable. So, your standard tax rate for your individual tax rate will be applied to that portion of your Social Security benefits, while the remainder will be untaxed.

If SSI is your sole source of income, it’s unlikely that your Social Security benefits will be taxed. However, if you have other income sources, it’s important to plan to pay for taxes on at least a portion of your SSI when you file your return.

How to Reduce Taxes on Your SSI

Taxes on Social Security income can be extremely hard to face. For starters, those who receive Social Security benefits are usually on a fixed income. Then, because SSI is not taxed upfront, recipients have to pay the full taxes on that income all at once, when they file their returns. This usually makes the amount due when you file much higher than it would be on income that already has some taxes withheld (such as the paychecks you likely received when you were still working).

If you’re concerned about what your tax bill will look like when you’re on Social Security income, there are a few things you can do to reduce the amount you owe:

1. Voluntary withholdings – Just as you can adjust withholdings on a standard paycheck, you can opt for withholdings on your SSI checks as well. You can find the form you need here, on the IRS’s website. You can also call the Social Security Administration and request a copy of the form (Form W-4V) be sent to you via mail.

2. Drawing on other accounts – Many people believe that they should take SSI as soon as they retire, but that’s not always the best course of action. Because additional sources of income can drive you up into those taxable thresholds for your SSI, it could be a good idea to draw down other retirement accounts first, then rely on SSI when you don’t have other income.

3. Monitor income carefully – Finally, make sure you’re carefully monitoring your income and planning for your taxes accordingly. By knowing the thresholds for SSI taxes, you can be more proactive about controlling your income sources, ensuring you know where you fall in the income thresholds, and planning ahead for any potential tax bills. And, of course, our tax experts can help you with this.

Know Your Taxable Income Sources

In conjunction with that last tip, it’s important that you know which income sources are considered taxable, as there are certain revenue streams you can utilize to supplement your SSI without worrying about pushing yourself over those taxable thresholds. One common example is your Roth IRA. If you contributed to such an account while you were working, you were taxed on that income prior to putting it into the account. This makes your withdrawals non-taxable income, so those funds won’t push you above the income threshold to have your SSI taxed.

One final note regarding SSI taxes: Each state can impose their own tax rates on Social Security benefits, regardless of whether or not your SSI is subject to a federal tax. It’s important to be aware of the tax rate on this type of income in your state. However, there’s good news for our local clients—Florida does not tax Social Security benefits at all.

If you have further questions about how your Social Security income is taxed, give us a call.