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A common misconception about Social Security is that whether your benefits are taxed depends on the state you live in. While state tax laws do vary, the federal rules are the same across the board. So, is your Social Security benefit taxable? In many cases, the answer is yes.

In this episode of Money Wisdom, Jake Doser, CFP®, CPWA® and Nicholas J. Colantuono, CFP® break down how Social Security benefits are taxed at both the federal and state levels, and explain how the timing of your benefits may impact your tax situation.

Federal Tax Rules

At the federal level, whether your Social Security is taxed depends on your modified adjusted gross income. This figure includes all sources of earned income plus half of your Social Security benefit. If your combined income falls below certain thresholds, your benefits may not be taxed. But if it exceeds those levels, a portion can be subject to federal income tax.

If you’re a single filer and your combined income is under $25,000, or if you’re married filing jointly with under $32,000, your Social Security is likely tax-free at the federal level. Once you cross those thresholds, up to 50% of your benefits may be taxed. If your combined income is above $34,000 as a single filer or $44,000 as a couple filing jointly, up to 85% of your Social Security benefits could be taxable.

The exact tax owed depends on your total income and which tax bracket you fall into. For instance, if your monthly benefit is $2,000 and 50% is taxable, then $1,000 would be counted as taxable income and taxed at your marginal rate.

State-Level Differences

While federal tax rules are uniform, state-level taxation varies. In Connecticut, for example, Social Security benefits are not taxed if your adjusted gross income is under $75,000 for single filers or $100,000 for joint filers. In contrast, Massachusetts does not tax Social Security benefits at all, regardless of income. That said, many other states fall somewhere in between, so it’s important to understand your own state’s policies.

Why Timing Matters

The decision of when to claim Social Security is a critical part of your broader retirement strategy. While waiting longer can increase your monthly benefit, that’s only part of the picture. Keep in mind that taxes on Social Security are contingent upon the other sources of income that you have. So, ask yourself, when do you actually need the money, and what other sources of income do you have access to? These are all considerations to discuss with your financial advisor when reviewing your overall retirement plan.

Need help making the right Social Security decisions? Get your free Social Security Decisions guide by texting “SOCIAL” to 800-757-0436.