CONNECTICUT MONEY: Will you pay taxes on Social Security?

This article was published in the New Haven Register on October 9, 2020.

After a lifetime of hard work and paying into the Social Security system, once you retire you can relax and enjoy a monthly check from the federal government for life, right? Well, yes, but you’ll probably have to pay taxes on some of your Social Security benefits.

Many people are surprised to find this out, even though the federal government has imposed a tax on these benefits since 1983. Some people pay no taxes, others pay up to 85 percent, depending on your income.

As with most things federal, it’s complicated. If your income falls below $25,000 for an individual or $32,000 for a married couple filing jointly, you will not owe taxes on your benefits.

You’ll pay tax on up to 50 percent of your benefit total if your income falls between $25,000 and $34,000 for an individual or $32,000 and $44,000 for a married couple filing jointly. You’ll pay tax on up to 85 percent of your benefits if your income exceeds $34,000 for individuals or $44,000 for couples.

You may wonder how this is justified, since you already paid taxes on the money that you paid into the system. Briefly, there are two main reasons: First, half of the contribution total for employees is paid by employers who deduct their portion. Second, workers who live to their average life expectancy typically receive far more than they put in.

So how is “income” defined under the Social Security Administration (SSA) rules? It’s your adjusted gross income (AGI) plus tax-exempt interest plus half of your Social Security benefit total. AGI includes wages or earnings from self-employment, taxable interest, dividends, distributions from qualified retirement accounts such as 401(k) plans, and any other taxable income that you have to report on your income tax returns.

Residents of 13 states, including Connecticut, also must pay state taxes on Social Security earnings. In Connecticut, anyone who earns less than $75,000 (individual filer) or $100,000 (joint filer) per year is exempt from paying taxes on their Social Security benefits.

Note that Supplemental Security Income (SSI), for the disabled, blind or elderly poor, is not ever subject to taxation.

The average monthly Social Security benefit in June 2020 was $1,514 for retired workers and $1,259 for disabled workers. For the average retired person, Social Security benefits represent about 33 percent of their income, according to SSA.

A financial planner can discuss ways for you to minimize your tax liabilities, taking into account your overall financial picture. When it comes to Social Security taxation, one strategy is to withdraw funds from retirement accounts early, in order to lower AGI in later years. You can make distributions without paying penalties after age 591/2, although you have to pay the taxes. This strategy can also help you delay taking your Social Security benefits, by providing early retirement income. But again, this type of strategy should be considered only within the larger context of your complete financial situation.