IRS Warns Retirees: The Tax Rule Social Security Recipients Can't Afford To Ignore

While Social Security benefits are a safety net for many retirees, they are not tax free, despite what you might assume. This can leave some facing an unexpected tax bill after other parts of their income pushes them over the limit. However, the IRS makes it clear: you could owe taxes on your benefits depending on your filing status and total income. If Social Security is your only source of income, you likely won't pay taxes on it. But if you're also pulling money from pensions, investments, or even a part-time job, your total earnings could cross the threshold to become taxable.

You can determine if your Social Security benefits are taxable by calculating your combined income. This includes your adjusted gross income (AGI), half of your annual Social Security benefits, and any tax-exempt interest (like income from municipal bonds). If this total goes over the IRS threshold, part of your benefits will feature into your taxable income. However, it's important to realize that this rule only applies to Social Security benefits — meaning Supplemental Security Income (SSI) benefits are not taxable. SSI is a separate program designed to help low-income seniors and people with disabilities cover basic needs like food, housing, and clothing. It's also worth researching how your individual state handles Social Security taxes. For example, Florida won't tax your Social Security benefits but some states will.

If you're single and your combined income is between $25,000 and $34,000, up to 50% of your Social Security benefits could be taxable. If that number goes over $34,000, up to 85% of your benefits can be taxed. For married couples filing jointly, the limits are a bit higher — up to 50% of your benefits could be taxed if your combined income exceeds $32,000, and up to 85% can be taxed if your income exceeds $44,000.

Say a retiree gets $20,000 in Social Security benefits and earns another $15,000 from a part-time job. The IRS would calculate their income by adding half of their Social Security benefits ($10,000) to their other income ($15,000). That brings their total to $25,000. Since this is right at the lower threshold for single filers, up to 50% of their Social Security benefits could be taxed. For a married couple with a combined income of $75,000 that also receives $40,000 in benefits, their taxable portion is much higher. The IRS adds half of their Social Security benefits amount ($20,000) to their other income ($75,000), bringing their total to $95,000; well above the highest threshold. That means up to 85% of their Social Security benefits could be taxed.

Learning how to manage your taxable income can be the key to financial success during retirement. For starters, choosing a withdrawal schedule that works best for your lifestyle can be key — such as using the 4% retirement savings rule. With this strategy you simply withdraw 4% of your total savings (from accounts like 401(k)s, IRAs, or other investments) in your first year of retirement. Then — after adjusting the withdrawal amount for inflation — you pull out the same amount in every subsequent year. This allows you to have a steady income stream while keeping your savings from running out too soon.

How you file your taxes matters, too. If you are married, do you file jointly or separately? Maybe, maybe not. Filing separately might reduce how much of your Social Security benefits are taxed, but it can come with trade-offs. Couples who file separately lose access to certain tax deductions and credits, and they also face lower IRA contribution limits. That's why it's worth talking to a tax professional who can help figure out which filing status might work best for your specific situation. It's also worth mentioning that your investment choices can affect how much of your Social Security benefits get taxed. For example, municipal bonds are usually tax-free at the federal level, but they aren't always exempt from state or local taxes. That means they might still count toward your combined income, which could push more of your Social Security benefits into the taxable range.