The government can tax up to 85% of your Social Security. Here’s how to find out exactly how much

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Up to 85% of Social Security benefits may be subject to taxation.
The tax due on a person’s Social Security benefit depends on their provisional income, which is annual earnings plus 50% of the annual Social Security benefit.
Social Security recipients can pay their estimated taxes quarterly, through benefit withholdings, or in full with their federal tax return.
A new report concluded that the Social Security program will be underfunded as soon as next year, and experts predict an overhaul is on the horizon.
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Taxes don’t get a whole lot easier later in life. In fact, when you throw Social Security into the mix, things can get pretty hairy.

No matter a person’s income, 15% of their Social Security benefit is tax-free. The rest, however, is subject to taxation depending on their larger financial picture. About 40% of people who get Social Security have to pay income taxes on their benefits.

The vast majority of retirees can’t subsist on Social Security alone. The average person currently receiving Social Security benefits is getting just $1,420 a month, or $17,040 a year (the maximum for someone retiring in 2019 is $2,849 a month). Additional income from investments and retirement savings accounts, such as a 401(k) or IRA, are often necessary to fund a comfortable lifestyle and afford the high cost of healthcare.

Just how much Social Security benefits are taxed depends on a person’s provisional income, or the combination of all earnings in a given year, plus half of their Social Security benefits.

How is Social Security taxed?

Provisional income is equal to adjusted gross income (AGI) plus non-taxable interest plus 50% of annual Social Security benefits. That total is then applied to the following income limits to determine the tax rate:

If provisional income is $25,000 or less for a single filer, or $32,000 or less for joint filers, no tax is owed on Social Security benefits
If provisional income is between $25,001 and $34,000 for a single filer, or $32,001 and $44,000 for joint filers, 50% of the Social Security benefit may be taxed at the filers’ marginal tax rate
If provisional income is $34,001 and above for a single filer, or $44,001 and above for joint filers, 85% of the Social Security benefit may be taxed at the filers’ marginal tax rate

Not sure when to start claiming Social Security benefits? Find out with this calculator from our partners:

For example, let’s say a retired woman, Susan, receives the average Social Security benefit, totaling $17,040 for the year. Susan earned $31,480 from other means throughout the year, so her provisional income is $40,000 (half of her Social Security benefit plus her AGI and any other earned interest). As such, 85% of Susan’s total Social Security benefit, $14,484, will be taxed at her marginal tax rate (22%).

Every January, the Social Security Administration sends an earnings statement to Social Security recipients showing the amount they were paid in benefits throughout the tax year. The statement is used to fill out their federal income tax return, which will determine whether tax is owed on Social Security benefits.

If Social Security recipients anticipate they’ll need to pay taxes on their benefit and want to do so ahead of time, they can make estimated quarterly payments (like an independent contractor would) or elect to have federal taxes withheld — either 7%, 10%, 12%, or 22% of their monthly benefit.

Social Security isn’t in great shape, on the whole. According to a new report from the trustees of Social Security and Medicare, the federal program that pays out retirement and disability benefits to millions of Americans will be in the red in 2020 and "all later years," paying out more than it’s taking in in funding.

Every working American pays into the Social Security and Medicare systems through a 7.65% payroll tax, or a 15.3% tax if self-employed, which covers both the employee and the employer portions.

Taxes being paid by workers at present aren’t saved for their own future retirement. Instead, they go toward funding Social Security benefits for the currently disabled or retired, as well as retirees’ spouses and dependents, and surviving dependents and spouses.

As Darren Fonda explained in Barron’s, the program is being supported by a strong economy and low unemployment right now, but that surely won’t last for long.

"And even that might not be enough to overcome the demographic headwinds: There are millions more Baby Boomers than the following demographic group, Generation X, resulting in fewer workers supporting more retirees. Life spans are slowly rising, moreover, as is the cost of medical care," Fonda wrote.

In order to keep the Social Security program operational, experts predict major changes are coming — either a reduction in benefits and/or an increase in the payroll tax.

Are you on track for retirement? Find out with this calculator from our partners:

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