How Much of Your Social Security Is Taxable? A Guide for Ohio Retirees

The Short Answer: Up to 85% of Your Benefits Can Be Taxable

Plenty of Ohio retirees assume Social Security is tax-free. Others have heard that the government taxes 85% of it and picture handing most of their check back. Neither is right. The real answer depends on your other income, and it is easy to work out once you know the steps.

Here is the headline. Depending on your income, the IRS may treat none, part, or up to 85% of your benefits as taxable income. That does not mean you pay 85% in tax. It means up to 85% of your benefits gets added to your taxable income and taxed at your ordinary rate, while the remaining 15% is never taxed at the federal level.

The big variable is how much other money you have coming in: pension, IRA withdrawals, interest, dividends, and part-time wages. For many Dayton-area retirees, including those with a GE Aviation pension or a Wright-Patterson retirement income alongside Social Security, those other sources are exactly what tips benefits into the taxable zone.

Step One: Figure Your Combined Income

The IRS looks at one-half of your Social Security benefits plus all of your other income. Think of it as a yardstick. SSA describes it as 50% of your benefit plus your other income, and the IRS adds that tax-exempt interest, such as municipal bond interest, counts too.

On the IRS worksheet, “other income” is built from the lines on your Form 1040 that report taxable interest, dividends, IRA distributions, pensions and annuities, capital gains, and other income. A few specifics worth knowing:

• Tax-exempt interest still counts toward the yardstick, even though it is not taxed itself.
• If you are married filing jointly, you combine your income and benefits with your spouse’s, even if your spouse receives no benefits.
• The person with the legal right to the benefits reports them.

Step Two: Compare It to the Base Amounts

Your benefits can become taxable once the yardstick passes a base amount set by your filing status. The IRS and SSA publish these figures:

• $25,000 for single, head of household, or qualifying surviving spouse.
• $32,000 for married filing jointly.
• $0 for married filing separately if you lived with your spouse at any time during the year. (If you lived apart all year, the base amount is $25,000.)

Above the base amount, up to 50% of your benefits can be taxable. Past a second line, up to 85% can be taxable: when the total of one-half of your benefits and your other income is more than $34,000 (or $44,000 if married filing jointly). For married people filing separately who lived together at any time during the year, the base amount is $0 and up to 85% of benefits can be taxable.

Under the IRS worksheet, taxable benefits are the smaller of two numbers: 85% of your total benefits, or the amount the worksheet calculates from your income. That cap is why no one ever has more than 85% of benefits taxed.

Worked Examples: Four Hypothetical Retirees

These examples are hypothetical and use the IRS worksheet steps, assuming income comes only from Social Security and a pension or IRA, with no adjustments. Your own return will differ, so treat them as a way to see the mechanics.

Example 1: Single, modest other income

Social Security of $24,000 and $20,000 from a pension. One-half of benefits is $12,000, so the yardstick is $32,000. That is $7,000 above the $25,000 base amount and below the $34,000 line, so the 50% rule applies: half of the $7,000 is $3,500 of taxable benefits. That is about 15% of her benefits.

Example 2: Single, larger IRA withdrawals

Social Security of $30,000 and $30,000 of other income. One-half of benefits is $15,000, so the yardstick is $45,000. The first tier adds $4,500 (half of the $9,000 between $25,000 and $34,000). The second tier adds 85% of the $11,000 above $34,000, which is $9,350. Together: $13,850 taxable, about 46% of his benefits.

Example 3: Married couple filing jointly

Combined Social Security of $48,000 and $40,000 of pension and IRA income. Half of benefits is $24,000, so the yardstick is $64,000. The first tier adds $6,000 (half of the $12,000 between $32,000 and $44,000). The second tier adds 85% of the $20,000 above $44,000, which is $17,000. Together: $23,000 taxable, about 48% of their benefits.

Example 4: The ceiling

Single, Social Security of $30,000 and $50,000 of other income. The worksheet math would reach $30,850, but 85% of $30,000 is $25,500, and that smaller number is what counts. $25,500 taxable, the 85% maximum.

Why an Extra IRA Dollar Can Cost More Than It Looks

People sometimes call this the “tax torpedo,” and the arithmetic explains the name. Inside the 50% range, each extra dollar of income can also pull in 50 cents of benefits, so $1 of added income raises taxable income by $1.50. Inside the 85% range, each extra dollar can pull in 85 cents, so $1 raises taxable income by $1.85, until you hit the 85% ceiling.

Take Example 2 again. If he takes an extra $1,000 from his IRA, his taxable benefits rise from $13,850 to $14,700, an increase of $850. His taxable income goes up by $1,850 even though he only withdrew $1,000. His tax bracket is the same, but the same bracket now applies to nearly twice as much income.

Once benefits reach the 85% ceiling, that extra effect stops. Before that point, though, the order and timing of withdrawals matter more than most retirees realize.

Ways to Manage the Tax

Use qualified charitable distributions if you give to charity

If you are at least 70½, a qualified charitable distribution (QCD) is generally a nontaxable distribution made directly by the trustee of your IRA to an eligible charity. It also counts toward your required minimum distribution. Because it is nontaxable, it does not add to the income yardstick the way a regular IRA withdrawal would.

Watch large one-time withdrawals

A big IRA withdrawal for a roof, a car, or a family gift raises your income for that year, and it can pull more of your benefits into the taxable column. If you have flexibility, spreading a large withdrawal across two tax years may keep you out of the steepest part of the range. A tax professional can run the numbers on your actual return.

Plan the withholding

SSA lets you choose to have federal income tax withheld from your benefits. The options are 7%, 10%, 12%, or 22% of your monthly payment. You can start, stop, or change withholding online through your SSA account, or by calling 1-800-772-1213. You can also use IRS Form W-4V, or pay estimated tax instead.

Your Form SSA-1099, which shows the benefits you received, arrives by early February, and you can also get it online from SSA.

What Ohio Does With Your Social Security

Here is the good news for Miami Valley retirees: the Ohio Department of Taxation states that “Ohio does not tax Social Security benefits.” But you have to claim it. To avoid Ohio tax on the taxable portion, you claim the Ohio deduction for taxable Social Security benefits on the Ohio Schedule of Adjustments. If the taxable amount is larger than your federal adjusted gross income, you can deduct only up to that income.

Other retirement income, such as pension and IRA withdrawals, is usually taxed by Ohio, although Ohio’s retirement income credit and senior citizen credit may reduce the bill. The Ohio Department of Taxation explains who qualifies, and a tax preparer can check your return.

Common Mistakes We See

• Forgetting tax-exempt bond interest. It counts toward the yardstick even though it is not taxed.
• Skipping the Ohio deduction. Ohio does not tax Social Security, but the deduction has to be claimed.
• Relying on last year’s numbers. Check the current base amounts in IRS Publication 915 each tax year.
• Not setting up withholding and then facing a surprise bill in April.

Get a Second Opinion Before You Withdraw

The right answer depends on your pensions, your savings, and your spouse’s benefit. At Medicare & Retirement Solutions Group in Beavercreek, we help Dayton-area retirees map out where income will come from before the tax bill arrives. Call us or visit medretiregroup.com for a free consultation.

This article is general educational information, not individualized tax, insurance, or investment advice. Rules and figures change and individual circumstances vary — please confirm details with your plan, or speak with a qualified professional, before acting.