Social Security Tax Cliff: Just $1 Could Increase Taxable Income by 35%

Old retired asian senior couple checking and calculate financial billing together on sofa involved in financial paperwork, paying taxes online using e-banking laptop at living room home background stock photo
whyframestudio / iStock.com

According to the Social Security Administration, about 40% of all Social Security recipients pay income taxes on their benefits. Depending on how much you receive in additional income per year, you might be subject to a taxation “cliff” based on certain factors.

Social Security: Most Americans Don’t Know the Basics
Explore: 15 Worst States To Live on Just a Social Security Check

Your level of combined income is what’s used to determine your taxable level, with combined income consisting of your adjusted gross income plus nontaxable interest and half of your Social Security benefits. 

Nontaxable interest means non-taxed interest you may receive from investments like U.S. savings bond interest and municipal bond interest. IRA deductions can also be non-taxed depending on the contribution type.

Adjusted gross income is found by subtracting certain deductions from your overall income. Before retirement, these deductions typically include 401(k) contributions, or contributions to accounts like health savings accounts (HSAs) and education. During retirement, though, these deductions dwindle.  This, plus half of your total Social Security benefit determines your level of combined income taxable by Social Security. 

Retire Comfortably

The “cliff” begins as follows.

The SSA’s guidance on Social Security taxes states that if you file a federal tax return individually, and your combined income is between $25,000 and $34,000, you may have to pay taxes on up to 50% of your Social Security benefits. If your combined income exceeds $34,000, up to 85% of your Social Security benefits is subject to income tax. This means even one dollar above $34,000 makes you subject to taxation.

Related: Social Security Benefit Recipients Should Know About These Two Credits This Tax Season

If you file jointly, and you AND your spouse have a combined income between $32,000 and $44,000, you may have to pay taxes on 50% of your benefits. If your joint combined income exceeds $44,000, up to 85% of your benefits is subject to income tax.

Important to note: no more than 85% of your Social Security benefit will ever be subject to tax.

If you are married, but file separate returns, the SSA claims “you will probably pay taxes on your benefits.”

Retire Comfortably

Income can quickly add up, especially if there are several different sources from other investments. For example, if you are drawing on investment accounts that you have held for years in additional to the Social Security checks you receive each month, it’s very likely your benefits will be taxed. Ideally, Social Security benefits will not be your main source of income regardless, but if they are, then it’s just as likely you won’t be taxed anyway.

Social Security: When Provisional Income Can Lead to 100% Tax-Free Benefits
Discover: Can I Use My Social Security Statement as Proof of Income?

Every January, benefit recipients are sent a Form SSA-1099 (Social Security benefit statement) which shows the amount of benefits you received in the previous year. You can use this statement when filing your taxes to find out if your specific Social Security benefits will be taxed.

More From GOBankingRates

Share this article:

Retire Comfortably

About the Author

Georgina Tzanetos is a former financial advisor who studied post-industrial capitalist structures at New York University. She has eight years of experience with concentrations in asset management, portfolio management, private client banking, and investment research. Georgina has written for Investopedia and WallStreetMojo. 
Learn More