If your total combined income exceeds certain thresholds, up to 85% of your Social Security benefits may be taxable. Understanding how Social Security is taxed can help you make informed decisions about when to claim your benefits and how to maximize your retirement income.

Join Heath Grossman, CFP® in this week’s Money Wisdom Question Series as he explains how you can plan ahead and avoid surprises at tax time.

Calculating Taxability

Social Security benefits were exempt from federal income tax up until 1984. Since then, a portion of benefits has become taxable, depending on your provisional income. This income includes your adjusted gross income (AGI), nontaxable interest, and half of your Social Security benefits for the year.

If you’re unsure whether your Social Security benefits will be taxable or want to plan ahead, the IRS provides a quick and easy-to-use calculator on its website. This tool can help you get a better idea of your potential tax situation.

Understanding the Tax Rate

The Social Security Administration estimates that, on average, about 56% of beneficiary families owe federal taxes on a portion of their benefits. The degree of taxation can range anywhere from 0% to 85%, depending on your total combined income. It’s important to note that this doesn’t mean an 85% tax rate — it means that up to 85% of your benefits could be subject to federal taxes.

Accounting for State Income Taxes

For the 2024 tax year, nine states imposed some level of state income taxation on Social Security benefits: Colorado, Connecticut, Minnesota, Montana, New Mexico, Rhode Island, Utah, Vermont, and West Virginia.

In the state of Connecticut, many retirees can deduct most or all of their benefits based on their AGI and filing status. Social Security benefits are entirely tax-free for single filers and heads of household with an AGI below $75,000, and for married couples filing jointly with an AGI below $100,000. For those above these income thresholds, 75% of Social Security benefits remain tax-exempt.