Federal Tax on SS

[jimbohoward69]

I FIRE'd in June of 2025 (55 y/o & file single). $1.2M net worth and two monthly pensions (Military - $2,852 post tax & VA - $2,102 tax free). I was doing some "pre-planning" today regarding SS, and when I should start taking it. It was then I discovered that SS is taxed if your "income" is above certain thresholds. In all my years of fiscal research, I never knew about this. Go figure. With that, I have a couple of questions.

Are the threshold amounts that are used to decide what percentage of your SS is taxed based on AGI? Or taxable income?

If AGI is the answer, I think that's horses***. You base SS taxation on AGI, but yet I can't contribute to a Roth IRA because my pension income is not "earned"?! I guess I'm just frustrated at the double-standard. Or maybe I'm just making an apples-to-oranges comparison since I'm perturbed. Either way, I'm in a pretty good position, so I guess I shouldn't complain

 

[RetiredHappy]

First of all, Thank you for your service!

I had never been eligible to contribute to Roth IRA. From the get-go I have always expected to be taxed 85% of my SS.

 

[cathy63]

It's neither AGI nor taxable income because both of those include the taxable part of Social Security. It's basically all non-SS taxable income plus tax-exempt interest minus adjustments from Schedule 1 Part II.

 

[TheWizard]

Best to assume that 85% of your SS will be subject to Federal income tax and then be pleasantly surprised if it's less than that for the first few years...

 

[pb4uski]

SS taxation is not based on AGI, so you jumped the gun.

The part of your SS benefits from "growth" is taxed but the amount that is a return of your taxes paid is not taxed although the calculation is quite crude, it is generally generous.

When you finish your 2025 tax return, that would be a good time to add your SS and see how much of your SS income will be taxed. Or try IRS & State Tax Calculator | 2005 -- 2025

For the 2026 tax year, the thresholds for a single filer (including Head of Household) are:

If your Combined Income is...	Portion of Benefits Subject to Tax
Less than $25,000	0% (No tax)
$25,000 – $34,000	Up to 50%
More than $34,000	Up to 85%

 

[SevenUp]

Taxation of Social Security benefits - Bogleheads covers this in some detail.

 

[SecondCor521]

The SS taxation worksheet is on page 32 of this year's instructions at https://www.irs.gov/pub/irs-pdf/i1040gi.pdf.

The threshold amounts that you referenced are actually fixed dollar amounts based on filing status. See lines 8 and 10 of the SS taxation worksheet.

The 85% mentioned is on lines 15 and 17 of the SS taxation worksheet.

 

[VanWinkle]

SS taxation is not based on AGI, so you jumped the gun.

The part of your SS benefits from "growth" is taxed but the amount that is a return of your taxes paid is not taxed although the calculation is quite crude, it is generally generous.

When you finish your 2025 tax return, that would be a good time to add your SS and see how much of your SS income will be taxed. Or try IRS & State Tax Calculator | 2005 -- 2025

Inflation has also been non-existent since the brackets were established..... not.

 

[target2019]

With a pension that is approximately $35k pre-tax, you'll be taxed. You can access tables that show the amount that triggers 50% or 85% tax on SS.

 

[pb4uski]

So? What's your point? What in my post was incorrect?

To allow 0% and up to 50% of SS as taxable for some taxpayers was a political concession to get the votes needed for passage and gives lower income taxpayers a break on their taxes. IMO the hurdle was intentionally not adjusted for inflation so that over time more and more taxpayers would be swept into 85%. 85% was loosely based on SS actuaries estimate of 83% of benefits would be taxable on average.

Estimates by the Office of the Actuary of the Social Security Administration indicate that workers now entering covered employment in aggregate will make payroll tax payments totaling no more than 17 percent of the benefits that they can expect to receive. The self-employed will pay no more than 26 percent on average. Therefore, if social security benefits were accorded the same tax treatment as private pensions, only 17 percent of the benefit would be exempt from tax when received, and 83 percent would be taxable.

The SSA has the information to easlly calculate an exclusion ratio for each SS recipient similiar to the exclusion ratio for life annuities or contributory pension plans and they could report taxable SS on the 1099-SSA... but they don't and this crude mechanism for SS taxation persists to this day.

 

[target2019]

OP's idea of allowing pension income to fund a Roth was wishful thinking. I too wish that were true!

 

[leftymd]

but, but, but................Why do we hear the comments about "NO tax on Social Security" from those in charge? Low income earners have never been taxed on SS benefits yet those claiming it make it sound like something new. Not trying to be political but please tell it like it is.

 

[Car-Guy]

but, but, but................Why do we hear the comments about "NO tax on Social Security" from those in charge? Low income earners have never been taxed on SS benefits yet those claiming it make it sound like something new. Not trying to be political but please tell it like it is.

Agree, agree, agree.... When I first heard this I was ecstatic. (well pleasantly surprised) but then I read the details. Can't trust anything anyone says anymore. Why not say something like, for many more, their SS won 't be taxed.

Again, those of us with a few extra dollars carry more of the burden.

 

[Dtail]

Agree, agree, agree.... When I first heard this I was ecstatic. (well pleasantly surprised) but then I read the details. Can't trust anything anyone says anymore.

Ain't that the truth. The 6k additional deduction was the clever substitution for the no tax proposal for the uninformed.

 

[Al18]

In 1983, Congress passed amendments to the Social Security Act, which allowed for the taxation of Social Security benefits for the first time. This change took effect in 1984.

So this change happened 42 years ago, and is mentioned on every SS statement issued for the past few decades. Don’t know how this could be missed.

 

[VanWinkle]

In 1983, Congress passed amendments to the Social Security Act, which allowed for the taxation of Social Security benefits for the first time. This change took effect in 1984.

So this change happened 42 years ago, and is mentioned on every SS statement issued for the past few decades. Don’t know how this could be missed.

Wishful thinking I would guess!

 

[pb4uski]

I think ignorance is more likely. Some people just have trouble keeping up. Or have never focused on it.

 

[VanWinkle]

I think ignorance is more likely. Some people just have trouble keeping up. Or have never focused on it.

Do you agree that the SS taxation brkts should be adjusted for inflation?

 

[pb4uski]

Ain't that the truth. The 6k additional deduction was the clever substitution for the no tax proposal for the uninformed.

From what I'm reading, about 40% of SS recipients don't have any taxable SS and for another 24% had taxable SS that was less than the standard deduction and senior add to the standard deduction. So before the new 65+ deduction, about 64% of SS recipients paid no tax on SS. The new 65+ deduction increased that to 88%..

Now in doing these calculations they presume that deductions offset taxable SS first, before offsetting other sources of income so there is a bit of thumb on the scale in the way they do it.

 

[pb4uski]

Do you agree that the SS taxation brkts should be adjusted for inflation?

No. I believe that the SSA should provide your taxable SS on your 1099-SSA based on what you paid in payroll taxes relative to your benefits the same way that COLA adjusted life annuities are taxed so a portion of SS benefits would be excluded from taxes but it would vary from person to person depending on how much you paid in payroll taxes for retirement benefits. We have the technology to do this.

 

[VanWinkle]

No. I believe that the SSA should provide your taxable SS on your 1099-SSA based on what you paid in payroll taxes relative to your benefits the same way that COLA adjusted life annuities are taxed so a portion of SS benefits would be excluded from taxes but it would vary from person to person depending on how much you paid in payroll taxes for retirement benefits. We have the technology to do this.

We don't have the political will to do that so more people each year will fall into the SS taxation position including those in the lower middle class. Inflation adjustments happen almost everywhere else in the tax code, so why not the SS taxability brkts. I'll be glad to pay more taxes, just on Roth conversions that are now costing me double taxation due to the low SS taxation brkts.

 

[pb4uski]

I agree that we don't have the political will and it is unlikely to occur. Accordingly, I see nothing wrong with leaving SS taxation the way it is, not adjusting for inflation, and somewhere down the line almost everyone will pay taxes on 85% of SS consistent with the results of the SSA actuarial analysis long ago.

I don't see that you are being disadvantaged but I can understand why you think so. Let's say that back then they had the political will to just tax all SS at 85%. If that were the case then your marginal tax on Roth conversions would be at just your marginal tax rate.

The "double taxation" that you are complaining about is just the unwinding of a tax break that you have been getting the was unjustified to begin with, but I can understand why it is upsetting.

 

[Dtail]

We don't have the political will to do that so more people each year will fall into the SS taxation position including those in the lower middle class. Inflation adjustments happen almost everywhere else in the tax code, so why not the SS taxability brkts. I'll be glad to pay more taxes, just on Roth conversions that are now costing me double taxation due to the low SS taxation brkts.

Yeah, I am fighting that Roth conversion concept too. I am guessing most folks in the 12% tax bracket who wish to do Roth conversions have to calculate their marginal rates, plus best guess of future rates.

 

[Dtail]

From what I'm reading, about 40% of SS recipients don't have any taxable SS and for another 24% had taxable SS that was less than the standard deduction and senior add to the standard deduction. So before the new 65+ deduction, about 64% of SS recipients paid no tax on SS. The new 65+ deduction increased that to 88%..

Now in doing these calculations they presume that deductions offset taxable SS first, before offsetting other sources of income so there is a bit of thumb on the scale in the way they do it.

Good last point.

 

[TheWizard]

We don't have the political will to do that so more people each year will fall into the SS taxation position including those in the lower middle class. Inflation adjustments happen almost everywhere else in the tax code, so why not the SS taxability brkts. I'll be glad to pay more taxes, just on Roth conversions that are now costing me double taxation due to the low SS taxation brkts.

Those low fixed SS+ provisional income thresholds to determine 50% and 85% taxability of SS income were simply a compromise way back when they first start taxing SS.

The main goal was to make 85% of all SS taxable but they had to compromise to get enough votes.
Eventually, almost everyone will have 85% of SS added to their AGI.

Nonetheless, our Federal tax system is quite progressive so that says nothing about what your marginal or effective tax rate will be.
Low income folks will still have low effective tax rates...