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Retirement Planning > Social Security > Claiming Strategies

Social Security Benefits Are Taxed? Ouch!

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What You Need to Know

  • Welcome to Connecting the Dots, the column where Marcia Mantell discusses real-life decisions around Social Security claiming and retirement.
  • Retirees often find themselves in a higher tax bracket than they expected.
  • The tax implications of Social Security benefits are just one thing that can take new retirees by surprise at tax time.

A man who had retired at the end of 2020 recently reached out to me. With newfound time on his hands, he decided to try free tax software packages and do his own taxes this year. The surprise? His Social Security benefits pushed him into a higher-than-expected tax bracket.  “What’s up with that?” he wanted to know.

The Caller’s Income Situation

“Barry” waited until 70 to get his maximum Social Security benefit. His wife, “Lydia,” was a homemaker. Born in 1952, he was grandfathered into the former “file and suspend” strategy.

They took advantage of that strategy so Lydia’s spousal benefits started several years ago. Up to 2021, their income had been from W-2 wages, Lydia’s Social Security, and some interest and dividends.

Tax year 2021 was their first year of full retirement income.

Components of Retiree Income

Barry saw firsthand exactly what is considered “income” as a retiree. They now have a hodge-podge of income sources. Looking at the front of IRS Form 1040-SR, Barry noted their income was from:

  • Taxable interest
  • Ordinary dividends
  • IRA distributions from Lydia’s and his IRAs
  • Social Security benefits for both of them
  • Capital gains

He confirmed no pension or annuity income. They thought about renting out their vacation home, but rental income also would be taxable income.

Not All Social Security Income Is Taxable

Social Security benefits become taxable income when “combined” income exceeds $25,000 for a single filer and $32,000 for a married couple filing jointly. Either 50% or 85% of Social Security benefits can be pulled in as ordinary income.

Combined income is determined on a worksheet in the 1040 instruction booklet.  At a high level, a client must combine various parts of income from their 1040 in a creative way:

  1. 50% of total Social Security gross benefits, plus
  2. All other income on lines 2b – 5b, 7, 8, plus
  3. Tax-exempt interest as reported on line 2a, plus
  4. Certain adjustments from Schedule 1 that reduce income.

The sum of the parts is compared to threshold amounts in a series of steps on the worksheet. The end result is the dollar amount of Social Security that will be includable as income on line 6b of the 1040.

No Refund This Year

After decades of understanding how his income taxes worked, Barry was taken aback as a retiree learning to connect disparate dots of income.

He said, “I couldn’t believe I misunderstood ‘income.’  Thought I’d get a refund and instead ended up with a tax bill. Ouch!”

His $38,000 Social Security benefit, plus Lydia’s $17,500, pushed them into the 35% tax bracket by a few thousand dollars. If he had known how Social Security was taxed, he could have held off on some transactions that kicked off capital gains.

A Tricky Transition

The first year with no W-2 can catch clients off guard. They don’t understand each different income source’s tax withholding rules. Or the impact of combining many new taxable sources, including Social Security.

In Barry’s case, the bulk of their income came from IRA distributions. Typically, an IRA custodian only withholds 10% as prepayment on the tax obligation. A client can change the amount withheld, but still may not get the percent just right.

Social Security payments do not come with any withholdings. Interest, dividends and capital gains aren’t reported until year-end. The individual pieces don’t come together until tax time. That’s when newly retired clients find out they’re in a higher tax bracket and their estimated payments didn’t completely cover their tax bill.

Important IRS Resources for Clients 65 and Older

Financial advisors can help clients navigate full-on retirement. Offer these IRS resources to help clients connect new dots:

Moving into full-time retirement isn’t just about waiting until 70 to claim Social Security. New tax issues unexpectedly rise to the surface. Help your clients prepare for what “retiree income” really means.

Marcia Mantell is the founder and president of Mantell Retirement Consulting Inc., a retirement business development, marketing & communications, and education company supporting the financial services industry, advisors and their clients. She is author of “What’s the Deal with Retirement Planning for Women?,” “What’s the Deal with Social Security for Women?” and blogs at


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