Retirement should be a time to enjoy the fruits of your labor, but for many retirees, tax surprises can cast a shadow over their golden years. If you’re collecting both Social Security and pension payments, you might have noticed that a portion of your Social Security benefits are subject to taxation. Unfortunately, many retirees are surprised to find they owe additional taxes at the end of the year because insufficient withholding was taken out throughout the year.
Are Social Security Payments Taxable?
The answer depends on your total income and filing status. According to the IRS, up to 85% of your Social Security benefits can be taxable if your income exceeds certain thresholds. This includes your combined income — which is your adjusted gross income plus nontaxable interest plus half of your Social Security benefits.
Understanding the Taxation Thresholds
For 2025, the IRS considers the following thresholds:
- Single filers: If your combined income exceeds $25,000, up to 50% of your benefits may be taxable; over $34,000, up to 85% may be taxable.
- Married filing jointly: If your combined income exceeds $32,000, up to 50% may be taxable; over $44,000, up to 85% may be taxable.
If your income surpasses these levels, a portion of your Social Security benefits will be taxed at your ordinary income tax rates.
How Social Security Benefits Are Withheld and Tax Rates
When it comes to withholding, Social Security offers four withholding options:
- 7%
- 10%
- 12%
- 22%
The choice you make affects how much tax is taken out of your benefits each month. However, many retirees don’t adjust their withholding, leading to underpayment and a tax bill at tax time.
Why Proper Withholding Matters
Many retirees find themselves surprised at year-end because they didn’t have enough taxes withheld, resulting in a balance owed to the IRS. Proper planning can help prevent this:
- Review your current withholding rate: If you’re at a lower withholding rate like 7% or 10%, consider increasing it to reduce the chance of owing money later.
- Use IRS tools or consult a tax professional: To estimate your tax liability based on your income, and adjust your withholding accordingly.
- Consider quarterly estimated payments: If you prefer not to have taxes withheld from Social Security, making quarterly payments can help spread out your tax burden.
Strategies to Maximize Your Retirement Income and Minimize Taxes
- Adjust your withholding elections: Choose a higher withholding rate if you expect your benefits to be taxable.
- Stay informed: Tax laws change; regularly review IRS updates and consult with a tax professional.
Final Thoughts
Understanding the tax structure surrounding Social Security and pension income is crucial for effective retirement planning. By proactively managing your withholdings and income, you can minimize surprises and keep more of your hard-earned money.
For personalized advice tailored to your unique situation, consider consulting a financial or tax professional. Proper planning today can make all the difference in enjoying a worry-free retirement tomorrow.
JoAnna Laiscell
May 27, 2025
Suggested Reading & References
- Provisions Affecting Taxation of Benefits. Social Security Administration, Link.
- Lautz, Andrew. “What’s in the 2025 House Republican Tax Bill?” Bipartisan Policy Center, 23 May 2025, Link.
- Picchi, Aimee. “Social Security Recipients Were Hoping for a Tax Break — They’re Unlikely to Get One. Here’s Why.” CBS News, 22 May 2025, 10:11 AM EDT, Link.
