Social Security Taxation & Avoiding Reduction of Benefits While Working
Taxation of Social Security Benefits
Up to 85% of Social Security (SS) benefits may be includible in federal taxable income, depending on your combined income. Combined income is your Adjusted Gross Income (AGI) + tax-exempt interest + ½ of your SS benefit amount.
For filers who are single, head of household, or qualifying widow/widower, the SS benefit amount that is taxable is based on the following combined income brackets:
- $0 – $25,000: 0% Taxable
- $25,000 – $34,000: 50% Taxable
- $34,000+: 85% Taxable
For filers who are married filing jointly:
- $0 – $32,000: 0% Taxable
- $32,000 -$44,000: 50% Taxable
- $44,000+: 85% Taxable
The combined income brackets are progressive, meaning you’ll fill the 0% and 50% tax-includible brackets first. Once you calculate the amount based on the combined income brackets, it is capped by 85% of your total SS benefits since the IRS only wants to calculate how much your SS benefits should be included. Once that is calculated, the actual amount of tax you will pay will depend on your marginal tax rate.
For example, if a married couple in retirement has $30,000 in dividends & $35,000 each in social security benefits, their combined income would be $65,000 ($30,000 + ½($35,000) + ½($35,000)). The $0 – $32,000 bracket is filled up first at 0%, then the $32,000-$44,000 bracket is filled up, resulting in $6,000 (50% * $12k) being included for taxable income. After that, the final $21,000 combined income is multiplied by 85%, resulting in an additional $17,850 (85% * $21,000) includible for taxable income. This gives us $23,850 ($6,000 + $17,850) of taxable income. We then check to see if it needs to be capped by 85% of total SS benefits ($70,000 * 85% = $59,500). Since it is less than $59,500, it is not capped, and $23,850 is the final amount of taxable income.
Most states have no state income taxes for Social Security benefits. In the states where they are taxed, exemptions (depending on income level) may net out to paying $0 for state income taxes. There are no FICA taxes paid on Social Security benefits either.
Reduction of Social Security Benefits While Working
Social Security benefits will not be reduced due to earned income if you are at full retirement age or older. However, if you are younger than full retirement age, some of your benefits will be deducted if you are above a certain earned income.
If you are under full retirement age for the entire calendar year, $1 of SS benefits will be deducted for every $2 you earn above the limit ($22,320 for 2024).
If you reach full retirement age in a calendar year, $1 of SS benefits will be deducted for every $3 you earn above a separate limit ($59,520 for 2024). However, once you reach the month of your full retirement age, your benefits will no longer be reduced.
These limits are only for earned income (wages from a W-2 job or net income from a self-employment business). They apply individually, even if you are married.
Example 1: If your birthday is June 1, 1960, your full retirement age would be 67, which occurs on June 1, 2027. In 2026, if you are working a job that pays you $30,000 while receiving SS benefits, you are $7,680 above the limit ($30,000 – $22,320) and thus will have $3,840 ($7,680/2) of your SS benefits removed for 2026.
Example 2: Same scenario as Example 1, except you are now making $60,000 in 2027. You are only $480 above the limit ($60,000 – $59,520) and normally would receive a $160 reduction ($480/3) in benefits for the entire year. However, because you are turning full retirement age on June 1, you will only receive a reduction in benefits from January – May, making it a total penalty of $67 ($160*5/12).
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