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You are probably not the only one thinking that your Social Security benefits are tax-free. Whether you owe taxes on your benefits depends on your overall income and how you file your taxes. Notably, many people end up paying income tax on up to 50% or even 85% of their Social Security benefits.

Let us break down when and why your benefits may be taxable, how to calculate what you owe, and what you can do to reduce your tax bite in retirement.

Here’s When Social Security Becomes Taxable

If Social Security is your only source of income, you will most likely not owe any federal taxes. But once you add other income like wages, dividends, IRA withdrawals or even tax-exempt interest, you may cross the threshold and the IRS may start taxing your benefits.

To find out whether your Social Security benefits are taxable, the IRS uses your combined income. This is the sum of:

•    Your adjusted gross income
•    Any tax-exempt interest
•    Half of your Social Security benefits

If your combined income exceeds a certain threshold, part of your benefit becomes taxable.

Income Thresholds That Trigger Taxation

For Single Filers:

•    If your combined income is $25,000-$34,000, up to 50% of your Social Security benefits may be taxable.
•    If your combined income is more than $34,000, up to 85% of your benefits may be taxable.

For Married Couples Filing Jointly:

•    If the combined income is $32,000-$44,000, up to 50% of benefits may be taxable.
•    If your combined income is $44,000, up to 85% may be taxable.

A married individual who files separately and has lived with their spouse at any point during the year will likely have to pay tax on up to 85% of their benefits, regardless of income.

How to Manage or Reduce Taxes on Social Security

Once your combined income crosses those thresholds, your benefits will be taxed just like ordinary income. But there are steps that you can follow to manage or reduce the taxes that you will owe:

Use Roth Accounts Strategically:

Withdrawals from Roth IRAs or Roth 401(k)s are not counted toward your taxable income. This means that pulling money from a Roth instead of a traditional IRA can help you stay below the tax threshold.

Withdraw Taxable Income Early:

If you take money out of traditional retirement accounts after the age of 59 and a half but before claiming Social Security, you can reduce the size of your required withdrawals later and lower your taxable income when you receive your benefits.

Consider Annuities Like QLAC:

A Qualified Longevity Annuity Contract (QLAC) allows you to delay some retirement income to later in life. This can help reduce the income reported in your earlier retirement years and minimize how much of your Social Security is taxed.

Planning Ahead: Withholding & Filing

Every year in January, the Social Security Administration sends out Form SSA-1099, which shows how much you received in benefits the previous year. Use this form to determine whether you need to file taxes.

You can also request voluntary tax withholding from your benefits so you do not get hit with a big tax bill at filing time.

The Bottom Line

Taxes on Social Security benefits are tied to your income and not your age. If your combined income is above IRS thresholds, you may owe taxes on up to 85% of your benefits. But with smart planning, such as managing when and where you draw retirement income, you can lower or even avoid the tax impacts.

Before you retire, talk to a financial planner or tax advisor about how to structure your income streams. What you do now can make a big difference in how much of your Social Security you actually keep.