Social Security is a vital source of income for millions of American retirees. Over 66 million retired Americans receive Social Security benefits, including about six million baby boomers who started collecting in 2024. While Social Security is designed to replace only around 40% of pre-retirement income, many rely on it as their sole support in retirement.
The average Social Security payment to retired workers is under $2,000 per month, but the average retiree’s monthly expenses total $4,345. This gap makes every dollar of Social Security income crucial. That’s why it’s important to understand how the IRS taxes these benefits.
The federal government began taxing Social Security benefits with the Social Security Amendments of 1983. A second tier of taxation was added in 1993, creating the system still used today. Taxation is based on “combined income” which includes adjusted gross income (AGI), nontaxable interest, and half of Social Security benefits.
Beneficiaries with combined income below $25,000 ($32,000 for joint filers) pay no federal tax on benefits. Those with combined income between $25,000 and $34,000 ($32,000 to $44,000 for joint filers) may have up to 50% of benefits taxed.
How benefits are taxed
Individuals with combined income over $34,000 ($44,000 for joint filers) may have up to 85% of benefits taxed. About half of Social Security beneficiaries owe no tax on their benefits, mostly because their incomes are below the thresholds. On average, beneficiaries pay about 7% of benefits in income taxes.
Lower-income beneficiaries owe 1% or less, while the highest-income beneficiaries pay 20%. A challenge for many retirees is that the income thresholds for taxation have never been adjusted for inflation. As incomes rise over time, more Social Security recipients have benefits subject to tax.
While these policies were implemented to strengthen Social Security’s finances, they affect retirees’ overall tax picture no matter where they live. In 2024, President Trump proposed not taxing Social Security benefits. In 2025, legislation was introduced in Congress to implement this, but its prospects are uncertain.
Most retirees must carefully manage their incomes to minimize taxes on Social Security benefits. Understanding how these benefits are taxed is key to keeping more of this crucial retirement income.
Image Credits: Photo by Recha Oktaviani on Unsplash
