Personal Finance

50% of Americans Wrongly Think Social Security Benefits Are Tax-Free - Here's How It Actually Works

Ian Cooper

Published: November 10, 2024 4:41 pm

Last Updated: February 15, 2025 9:36 pm

At the moment, half of America believes Social Security benefits are tax-free.

That’s according to a July 2024 Nationwide Retirement survey, which you can see here.

While it would be nice if that wasn’t taxed, that’s not always true.

Key Points from 24/7 Wall St.:

• Half of America believes Social Security benefits are tax-free. However, that’s not always the case.
• One of the best ways to minimize Social Security taxes is by delaying taking the benefit.
• Also: Take this quiz to see if you’re on track to retire^(Sponsored)

According to the Internal Revenue Service (IRS), take half of the Social Security you collected during the year and add it to your other income. If you’re single and the total amount of half of Social Security plus other income is between $25,000 and $34,000, then up to 50% of the Social Security may be taxable. Over $34,000, and 85% of the benefits are taxable.

*Combined Income Formula:
Adjusted Gross Income (AGI) + Nontaxable Interest + (1/2 of Social Security Benefits)

Note: If your combined income goes above the base amounts ($25,000 for individual filers and $32,000 for joint filers), a portion of your Social Security benefits will be taxed, up to a maximum of 85%. The thresholds and percentages above remain unchanged for the 2024 and 2025 tax years. If you are married and file separately, you will likely pay taxes on your benefits. Always consult a tax professional or use IRS worksheets for precise calculations.

Of course, it’s also a good idea to touch base with an accountant about this.

Or, if you’re married and filing jointly, take half of your Social Security received over the year, plus half of your spouse’s Social Security and add that all to the combined income. If that total comes out to between $32,000 and $44,000, you may have to pay income tax on up to 50% of the benefits, added the Social Security Administration. If the number is above $44,000, then up to 85% of the benefits may be taxable.

Isn’t the IRS just so much fun?

If you’re married and filing separately, and lived with your spouse at any time over the last year, it’s not taxable at all, according to the IRS.

Here’s How to Minimize Those Taxes

One of the best ways to minimize Social Security taxes is by delaying taking the benefit. Plus, for every year you delay receiving Social Security up to the age of 70, you’ll get an 8% increase in your payments. After all, you can’t be taxed on money you haven’t received.

Second, prioritize taking money from tax-free retirement accounts, such as a Roth IRA. With a Roth, as long as the account has been open for at least five years, any distributions taken won’t count as taxable income when it comes to Social Security calculations.

Third, take advantage of tax-loss harvesting.

If you’re in stocks or bonds and you’re showing a loss, sell to realize the loss, which you can use as a tax deduction. In fact, according to BankRate.com, “The tax code allows you to write off up to a net $3,000 each year in investment losses. A write-off first reduces any other capital gains that you’ve incurred throughout the year. For example, if you have a $3,000 gain on one asset but a $6,000 loss on another, you can claim a deduction for the full $3,000 net loss.”

While we hope these suggestions help, be sure to check in with your financial advisor before proceeding with any financial changes.