Social Security Taxes: Essential Facts to Understand in 2025
Social Security benefits play a significant role in the financial security of many retirees. However, understanding how these benefits are taxed is crucial for effective retirement planning.
The taxation of Social Security benefits is based on a system known as combined income. This includes your adjusted gross income, nontaxable interest, and half of your Social Security benefits from the year.
It's a common misconception that tax rules for Social Security apply only to retirement benefits. In fact, benefits from Social Security trust funds, including survivor and disability benefits, are subject to tax rules. On the other hand, Supplemental Security Income (SSI) payments are not taxable.
The IRS uses a tiered system based on combined income to determine if Social Security benefits are taxable. If your combined income is under $25,000 (single) or $32,000 (joint filing), there is no tax on Social Security benefits. For combined income between $25,000 and $34,000 (single) or $32,000 and $44,000 (joint filing), up to 50% of benefits can be taxed. With combined income above $34,000 (single) or above $44,000 (joint filing), up to 85% of benefits can be taxed.
The net amount of Social Security benefits you receive is reported in Box 5 of your Social Security benefit statement (Form SSA-1099). If you find yourself owing taxes on your Social Security benefits, the IRS provides an online tool to help determine how much, if any, of your Social Security income is taxable.
Some states also tax Social Security benefits. As of 2025, eight states still do so: Colorado, Connecticut, Minnesota, Montana, New Mexico, Rhode Island, Utah, and Vermont. However, in New Mexico, many retirees won't pay a dime to the state at tax time due to higher income thresholds for exempting Social Security benefits passed in legislation last year.
Seeking the advice of a trusted tax professional can help in understanding the tax implications of Social Security benefits and developing a tax-efficient strategy for retirement years. This is particularly important when considering the impact of the cost-of-living adjustment (COLA) on taxes. For instance, a high COLA can move some recipients into a higher federal income tax bracket.
In some cases, withholding from Social Security checks can be preferable. This can be done by selecting the withholding option of 7%, 10%, 12%, or 22% when applying for Social Security, or by completing and submitting IRS Form W-4V.
Knowing how Social Security and taxes work is vital to making informed financial decisions in retirement. It's important to plan to avoid surprises and ensure your retirement years are as financially secure as possible.
