The amount your Social Security is taxed varies from 0 – 85% based on your provisional income.

Up to 85% of your Social Security pension may be taxed but if you have a lower income, you may not pay any taxes. If your income is between $25,000 and $34,000 on a single return or between $32,000 and $44,000 on a joint return, up to 50% of your benefits can be taxed.

It’s all about your provisional income, which is your adjusted gross income (without Social Security) plus half of your Social Security plus any tax-free interest like interest on muni-bonds.

For instance, a married couple with a combined Social Security of $30,000 annually and a provisional income of $37,000 will only pay taxes on $2,500 of their Social Security as shown in the charts below.

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Notice that the percentage of Social Security taxed in this example is only about 8%. The walk up to 50% is very slow and this benefits you.[1] There is also a $44,000 threshold for married recipients and an eventual 85% maximum cap.

The main thing to take out of this is to show you that it may be beneficial to reposition your other income sources in order to optimize your retirement income.

For example, it may be more beneficial to withdraw money from your Roth IRA instead of a Traditional IRA if you’re in danger of exceeding a threshold.[2] This the entire premise behind the Optimize Your Retirement Spreadsheet. It can save you thousands a year simply by repositioning your income in the most advantageous way possible.

Isn’t complicated enough for ya? No wonder accounting jobs are so secure and tax software like TurboTax sells so well. Not many people are able to figure there taxable amount on good ole fashioned paper and pencil.

Don’t get it – don’t worry. The point of this is just to get a rough idea of how your Social Security is taxed, not for you to try to calculate this on your own.

[1] Social Security income used to be 100% tax-free so maybe it’s not as beneficial as it looks.

[2] The thresholds to figure out the taxable amount of Social Security aren’t cliffs; they’re gradual. If you go over the thresholds, there’s only a small increase in taxable Social Security. Some cutoffs and thresholds are much more important like the age in which you claim Social Security.