Social Security serves as a crucial financial lifeline for millions of retirees, disabled workers, and their surviving family members across the United States. For many beneficiaries, it represents their primary source of income, which also means that these benefits can be subject to federal taxation.
Receiving Social Security retirement benefits does not prohibit beneficiaries from continuing to work. However, those who have not yet reached their full retirement age (FRA) may experience a temporary reduction in benefits if their earnings exceed the Social Security Administration’s (SSA) annual earnings limit. Once the full retirement age is attained, there is no limit on earnings, and benefits will no longer be reduced due to employment income.
Federal Taxation of Social Security Benefits
Each tax season, recipients of Social Security benefits must determine whether a portion of their benefits will be taxable at the federal level. The Internal Revenue Service (IRS) uses a calculation called “combined income” to assess this.
Combined income is computed by adding three components:
- Adjusted gross income (AGI), which includes wages, pensions, withdrawals from retirement accounts, and investment income;
- Any non-taxable interest income;
- And half of the annual Social Security benefits received.
Typically, Social Security recipients with combined income below $25,000 (or $32,000 for married couples filing jointly) are not required to pay federal taxes on their benefits. Those with combined income exceeding these thresholds may be subject to taxation on up to 50% of their Social Security benefits.