Navigating the complexities of retirement income and taxes can be challenging, especially when multiple income sources are involved. This guide will address the specific question of whether you need to pay taxes on your Social Security benefits if you also receive a pension.
Taxation of Social Security Benefits:
- Federal Tax: Up to 85% of your Social Security benefits may be subject to federal income tax if your “combined income” exceeds certain thresholds. These thresholds are:
- $25,000 for individuals filing as “single” or “head of household.”
- $32,000 for married couples filing jointly.
- $0 for married individuals filing separately.
- State Tax: Some states also tax Social Security benefits, while others do not. Check with your state’s tax authority for specific information.
Taxation of Pensions:
- Federal Tax: Pension income is generally taxed as ordinary income at your regular tax rate.
- State Tax: State taxability of pensions varies depending on your location.
Combined Income and Tax Implications:
- Combined Income Calculation: Your “combined income” for Social Security tax purposes includes your adjusted gross income, tax-exempt interest income, and half of your Social Security benefits.
- Tax Impact: If your combined income exceeds the thresholds mentioned above, a portion of your Social Security benefits will be taxed. Additionally, your pension income will be taxed at your regular tax rate.
Example:
- Individual with a combined income of $35,000, including $20,000 from a pension and $15,000 from Social Security benefits.
- Half of their Social Security benefits ($7,500) is added to their adjusted gross income and tax-exempt interest income.
- Their combined income is $42,500, exceeding the $25,000 threshold for individuals.
- Up to 85% of their Social Security benefits ($12,750) may be subject to federal income tax.
- Their pension income of $20,000 will be taxed at their regular tax rate.
Additional Considerations:
- Tax-Deferred Accounts: Withdrawals from tax-deferred retirement accounts, such as traditional IRAs and 401(k)s, are also taxed as ordinary income.
- Tax-Free Accounts: Withdrawals from Roth IRAs and Roth 401(k)s are generally tax-free, provided certain conditions are met.
- Tax-Advantaged Investments: Consider investing in tax-advantaged accounts to minimize your tax burden.
- Tax Planning: Consult a tax professional for personalized advice on optimizing your tax situation.
Understanding the tax implications of your Social Security benefits and pension income is crucial for effective retirement planning. By carefully considering your combined income and applicable tax thresholds, you can estimate your potential tax liability and make informed decisions about your retirement savings and withdrawals. Remember, seeking professional guidance from a tax advisor can help you navigate the complexities of retirement income taxation and ensure you are making the most tax-efficient choices for your unique circumstances.
Federal and state income taxes remain
If you live in a state that levies income taxes on specific retirement income types, you will also be subject to state income taxes in addition to federal income taxes, presuming your taxable income in retirement exceeds specific thresholds.
This covers earnings from pre-tax retirement plans such as annuities, pensions, IRAs, and 401(k)s, as well as, in certain situations, earnings from Social Security benefits.
Such taxable income is taxed at the following ordinary income tax rates for 2023.2
|
Tax rate |
Single filers |
Married filing jointly |
Head of household |
|
10% |
$0 – $11,000 |
$0 – $22,000 |
$0 – $15,700 |
|
12% |
$11,000 to $44,725 |
$22,000 to $89,450 |
$15,700 to $59,850 |
|
22% |
$44,725 to $95,375 |
$89,450 to $190,750 |
$59,850 to $95,350 |
|
24% |
$95,375 to $182,100 |
$190,750 to $364,200 |
$95,350 to $182,100 |
|
32% |
$182,100 to $231,250 |
$364,200 to $462,500 |
$182,100 to $231,250 |
|
35% |
$231,250 to $578,125 |
$462,500 to $693,750 |
$231,250 to $578,100 |
|
37% |
$578,125 or more |
$693,750 or more |
$578,100 or more |
And the following income tax rates for the 2024 tax year: 3
|
Tax rate |
Single filers |
Married filing jointly |
Head of household |
|
10% |
$0 to $11,600 |
$0 to $23,200 |
$0 to $16,550 |
|
12% |
$11,600 to $47,150 |
$23,200 to $94,300 |
$16,550 to $63,100 |
|
22% |
$47,150 to $100,525 |
$94,300 to $201,050 |
$63,100 to $100,500 |
|
24% |
$100,525 to $191,950 |
$201,050 to $383,900 |
$100,500 to $191,950 |
|
32% |
$191,950 to $243,725 |
$383,900 to $487,450 |
$191,950 to $243,700 |
|
35% |
$243,725 to $609,350 |
$487,450 to $731,200 |
$243,700 to $609,350 |
|
37% |
$609,350 or more |
$731,200 or more |
$609,350 or more |
Nonetheless, qualifying distributions from after-tax accounts, such as Roth IRAs and Roth 401(k)s, are typically not subject to federal or state taxes upon retirement. Municipal bonds are another potential source of tax-free retirement income. Municipal bond interest income is typically exempt from federal, and occasionally state and local, income taxes. Note: When disposing of municipal bonds or municipal bond funds, gains are typically subject to capital gains taxes.
Distributions from health savings accounts (HSAs) are also tax-free in retirement if the funds are used to pay for qualified medical expenses.4 If HSA distributions are used for any purpose other than qualified medical expenses, they’re subject to federal income tax at ordinary income tax rates. Additionally, if a nonqualified distribution from your HSA is made before the age of 65, you may still be subject to a 20% penalty on the distribution.
The maximum amount you can make in the months leading up to 2024, when you reach full retirement age, is $59,520.
Your eligibility for benefits will begin the month you reach full retirement age, with no upper limit on your income.
It is possible to work and receive Social Security retirement benefits simultaneously. On the other hand, we will lower your benefits if you are under full retirement age and earn more than the annual cap. No matter how much you make, we won’t cut your benefits starting the month you reach full retirement age.
When we figure out how much to deduct from your benefits, we count only the wages you make from your job or your net earnings if youre self-employed. We include bonuses, commissions, and vacation pay. We dont count pensions, annuities, investment income, interest, veterans benefits, or other government or military retirement benefits.
You will continue to pay Social Security taxes on your earnings for as long as you work, even if you are receiving benefits. But, we will review your record annually to determine whether the extra income you received will boost your monthly benefit. In the event of an increase, you will receive a letter from us detailing the new amount of benefits.
How Pension Income Affects Social Security Benefits
FAQ
Does pension count as income for taxing Social Security?
Can you collect a pension and Social Security at the same time?
How much will my Social Security be reduced if I have a pension?
Do you pay Medicare and Social Security tax on a pension?