Everyone must make applicable Social Security contributions on income, even those working past full retirement age. Working past full retirement age may also increase Social Security benefits in the future because Social Security contributions continue to be paid in.
Key Takeaways
- Depending on your income, you might pay income tax on part of your Social Security income.
- For 2023, couples filing jointly with combined income between $32,000 and $44,000 will have to pay tax on up to 50% of their benefits. If their combined income is more than $44,000, they'll be taxed on up to 85% of their benefits.
- For singles, those income thresholds are between $25,000 and $34,000 for 50%, and more than $34,000 for 85%.
- Social Security benefits are not subject to state income tax in 39 states.
Income and Taxation of Benefits
Continuing to work, however, may lower current payments, if any, taken during the year the full retirement age is reached, according to a Social Security Administration limit, which changes every year.
If the full retirement age is reached in July, for instance, the total benefit income earned from January to July must be below the limit, or Social Security benefits are lowered by $1 for every $3 of income over the limit, which is $56,520 for 2023 and $59,520 for 2024.
Additionally, if you areunderfull retirement agefor the entire year,$1is deducted from your benefit paymentsfor every $2you earn above the annual limit. For 2023, that limit is$21,240.
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That money is held by the Social Security Administration and repaid incrementally once the taxpayer is no longer working. There are no limits on income earned past the month that full retirement age is reached when the full benefit amount is paid no matter how much income is earned.
Taxpayer Bracket
However, taking Social Security benefits while continuing to work may have the unexpected negative consequence of bumping a taxpayer into a higher tax bracket. Most people forget that a certain percentage of Social Security benefits may be taxed—up to 85%—depending on filing status and combined income, including half of Social Security benefits.
Some states also tax Social Security benefits. It is possible to have taxes withheld from Social Security benefit payments by filling out IRS Form W-4V or requesting a Voluntary Withholding Request Form online.
As of 2023, your Social Security benefits may also be taxable at the state level in 12 states, at least to some beneficiaries. If you live in one of those states—Colorado, Connecticut, Kansas, Minnesota, Missouri, Montana, Nebraska, New Mexico, Rhode Island, Utah, Vermont, or West Virginia—check with the relevantstate tax agency. As with the federal tax, how these agencies tax Social Security varies by income and other criteria.
How to Lower Your Social Security Taxes
There are several remedies available for those who are taxed on their Social Security benefits. Perhaps the most obvious solution is to reduce or eliminate the interest anddividendsthat are used in the provisional income formula.
Therefore, the solution could be to convert the reportable investment income intotax-deferred income, such as from an annuity, which will not show up on the 1040 Form until it is withdrawn. If you have $200,000 incertificates of deposit(CDs) earning 3%, which translates into $6,000 a year, that will be counted as provisional income.
But the same $200,000 growing inside anannuity, with the interest reinvested back into the annuity, will effectively yield a reportable interest of $0 when computing provisional income.
Advisor Insight
Steve Stanganelli, CFP®, CRPC®, AEP®, CCFS
Clear View Wealth Advisors LLC, Amesbury, MA
As long as you are working and earning an income, whether in a self-employed capacity or for an employer, then you will be required to contribute to Social Security.
Whether or not you need to pay taxes on your Social Security benefits, however, depends on your modified adjusted gross income (MAGI). If your MAGI is above a certain threshold for your filing status (e.g. single or married filing jointly), then your benefits would be taxable. Up to 85% of a taxpayer’s Social Security benefits are taxable.
Generally, annuities become taxable income when they are taken as distributions depending on the account type. Therefore, virtually any investor who is not spending all of the interest paid from a CD or other taxable instrument can benefit from moving at least a portion of their assets into a tax-deferred investment or account.
Another possible remedy could be to simply work a little less, especially if you are at or near the threshold of having your benefits taxed.
How Much of Your Social Security Is Taxable After Reaching Retirement Age?
Notably, 85% of your Social Security is potentially taxable after retirement. Your annual income will determine taxes on your benefits. If you file as an individual and your income is between $25,000 and $34,000, 50% of your benefits will be taxed. Any amount over $34,000 will qualify 85% of your benefits to be taxed. If you are married filing jointly, 50% will be taxable if your combined income with your spouse is between $32,000 and $44,000. Over $44,000, 85% of benefits are taxable.
At What Point Does One Stop Paying Social Security Tax?
You are not required to pay any Social Security tax past the wage base limit, which for 2024 is $168,600, up from $160,200 in 2023. So if you earn $168,600 or more, the most you will pay in Social Security tax is $10,453. If you make less than $168,600, the most you will pay in Social Security tax will be less than that.
What Is the Social Security Tax Rate for Retirees?
In 2024, 7.65% is the combined rate for Social Security, at 6.20% up to the wage base limit of $168,600, and Medicare at 1.45% without a limit.
The Bottom Line
If you continue to work after the retirement age, you will need to contribute to Social Security. When you start receiving Social Security benefits, you may also be taxed on them, depending on your income. It is possible to be taxed at up to either 50% or 85% of your benefits. There are plenty of strategies to avoid being taxed, such as reducing your income, as well as reducing interest income and dividends.
