At the heart of a comfortable retirement lie two certainties: the punctual arrival of Social Security payments and the often surprising complexity of the U.S. tax code. There is a tax rule established decades ago that, while not exactly a classified secret, remains largely unknown to many current and future beneficiaries.
If you’re unaware of it, this could mean an unexpected bite out of your Social Security income. But the narrative doesn’t have to be one of fear, but rather empowerment: understanding this rule is key to preserving your benefits to the fullest. Today we’ll unravel the taxation of retirement benefits so you can plan with confidence and avoid surprises.
Understand your tax situation as a Social Security retiree
For a significant portion of retirees, Social Security benefits are subject to federal income tax. This is not a recent change; its foundations were laid in 1983 (for the 50% threshold) and expanded in 1993 (to 85%). The key is not the total amount of your pension, but what the IRS calls your “combined income” or “interim income.”
This figure is calculated by adding:
- Your Adjusted Gross Income (AGI, which includes pensions, interest, dividends and withdrawals from retirement accounts),
- Any non-taxable interest (such as that of some municipal bonds),
- And half of the total Social Security benefits received during the year. This combined income is the trigger that activates taxation.
Thresholds for taxable or non-taxable benefits
The thresholds that determine whether your profits are taxed are surprisingly low and, critically, have not been adjusted for inflation since their implementation. This means that more and more people are exceeding them. By 2025, the limits remain unchanged.
- For individual taxpayers: If your combined income is between $25,000 and $34,000, up to 50% of your profits may be taxable. Above $34,000, up to 85% is taxable.
- For married couples filing jointly: The 50% bracket applies between $32,000 and $44,000 of combined income. Above $44,000, the 85% bracket applies.
- Below those initial thresholds ($25,000 individual / $32,000 joint), your benefits are free of federal taxes.
How does this translate into concrete retirement dollars?
The formula is progressive. It’s not that 85% of your profits are automatically taxed once you exceed the limit. First, the portion subject to the 50% rate is calculated, and then, if applicable, an additional amount is added for the 85% bracket, never exceeding 85% of your total profit.
It is estimated that around half of all beneficiaries pay taxes on a portion of their benefits today. Without planning, a retiree with an average income could see their net income reduced by 10% or more due to this tax. Furthermore, unlike a salary, these taxes are not automatically withheld from your monthly check unless you specifically request it using Form W-4V. This can result in a substantial tax bill when filing your return or a reduction in an expected refund.
How to avoid a tax cut on your Social Security payment
Proactive planning is your best tool. Strategies such as making Roth withdrawals (whose funds are tax-free) before claiming Social Security, carefully managing capital gains asset sales, or taking advantage of health savings accounts (HSAs) can help keep your combined income manageable. Requesting voluntary tax withholding on your benefits can also prevent a surprise bill in April.
By 2025, there is even some encouraging news. As part of recent tax legislation, a new additional deduction for those 65 and older (up to $6,000 individually, $12,000 jointly) is being introduced, available from 2025 through 2028. This deduction, designed specifically to ease the burden of Social Security taxes, may partially or fully offset the impact for many retirees, especially those with moderate incomes. It is a temporary but valuable relief.
