How are Social Security benefits taxed?
Under current law, up to 85 percent of Social Security benefits are subject to federal and state income tax, depending on the taxpayer's income. For taxpayers with provisional incomes less than $25,000 ($32,000 for married joint taxpayers), all Social Security benefits are excluded from taxable income. For provisional incomes between $25,000 and $34,000 ($32,000 and $44,000 for married joint taxpayers), up to 50 percent of Social Security benefits may be subject to tax. For those with provisional incomes over $34,000 ($44,000 for married joint taxpayers), up to 85 percent of Social Security benefits may be included in taxable income.
In determining the amount of Social Security benefits included in taxable income, the provisional income measure used is adjusted gross income excluding Social Security benefits, plus one-half of Social Security benefits. Tax-exempt interest (e.g., from municipal bonds) is also included in provisional income.
What is the average monthly benefit for retired workers?
The average monthly benefit as of June 30, 2010, for couples both receiving benefits is $1,900. This works out to $22,800 per year for a retired couple at the average benefit level. For single recipients the average monthly benefit is $1,158 or $13,896 annually.
The following table shows income levels at which Social Security would be fully exempt, subject to inclusion in taxable income at the 50 percent rate, and subject to inclusion in taxable income at the 85 percent rate for an example couple and single retiree with the average level of benefits. Total income refers to the combination of taxable source income and Social Security.
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Taxation of Social Security Benefits, Tax Year 2011 |
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Retired married couple Annual Social Security income: $22,800 |
Retired single worker Annual Social Security income: $13,896 |
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| Social Security exempt | Total income less than $43,400 | Total income less than $31,948 |
| Social Security included in taxable income at 50% rate | Total income between $43,400 and $55,400 | Total income between $31,948 and $40,948 |
| Social Security included in taxable income at 85% rate | Total income between $55,400 and $71,141 | Total income between $40,948 and $49,550 |
| Social Security subject to full 85% inclusion in taxable income | Total income over $71,141 | Total income over $49,550 |
The table shows that a married couple that receives the average Social Security benefit of $22,800 and has total income from all sources of less than $43,400 is not subject to tax on any Social Security benefits, while a couple with average benefits and total income over $71,141 must include 85 percent of the Social Security, or $19,380, in taxable income. Social Security income included in taxable income is taxed at the same rate as other kinds of income---5.35 percent, 7.05 percent, or 7.85 percent, depending on the total amount of taxable income. [More information on income tax brackets]
How much does it cost the state to forego revenues from taxing Social Security benefits?
Minnesota conforms to federal law in excluding all or part of Social Security benefits from income tax. The Minnesota Department of Revenue's Tax Expenditure Budget for 2010-2013 shows an estimated cost in foregone tax revenues of $194.8 million in fiscal year 2011 and $199.7 million in fiscal year 2012 as a result of conforming to federal tax treatment of Social Security benefits.
Nine states do not have an income tax or have a tax limited to specific kinds of unearned income. The nine states: Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming.
Twenty-eight states with an income tax exempt Social Security benefits from taxation. The 28 states: Alabama, Arizona, Arkansas, California, Delaware, District of Columbia, Georgia, Hawaii, Idaho, Illinois, Indiana, Kentucky, Louisiana, Maine, Maryland, Massachusetts, Michigan, Mississippi, New Jersey, New York, North Carolina, Ohio, Oklahoma, Oregon, Pennsylvania, South Carolina, Virginia and Wisconsin. Missouri will fully exempt benefits beginning in tax year 2012, and Iowa will fully exempt benefits in 2014.
Four states exclude a portion of Social Security benefits that are subject to tax at the federal level or provide a full exclusion to taxpayers meeting income requirements. The four states: Connecticut, Iowa, Kansas, and Missouri. The amount excluded in Missouri will increase each year through 2012, when benefits will be fully exempt. The amount excluded in Iowa will increase each year through 2014, when benefits will be fully exempt.
Three states provide a general retirement income exclusion or credit that may result in the exclusion from taxation of part or all of Social Security benefits or in a credit against taxes otherwise due on Social Security benefits. Three states: Colorado, Utah, and West Virginia.
One state, Montana, subjects Social Security benefits to income tax on the same basis as the federal government, but uses a slightly different income measure to determine the amount of benefits subject to tax.
Six states apply the state income tax to Social Security benefits that are taxable at the federal level. The six states: Minnesota, Nebraska, New Mexico, North Dakota, Rhode Island, and Vermont.
February 2011