Social Security (SS) is a large foundation of financial security for many American retirees. The stream of monthly income makes retirement possible for millions and the guarantee that it will exist for the life of the recipient helps manage the risk of fully outliving one’s assets. SS is taxed in an extremely obscure way despite being so vital. SS taxation is one of the many reasons that one should hire a tax professional that can identify the best phases of your life to create income to complement a comprehensive distribution plan in retirement that minimizes your lifetime tax burden.  

The taxation methodology

The taxation of SS may take the cake as the section of the tax code that makes the least amount of sense. First, the way to calculate your Combined Income for SS purposes is different than calculating your income for your taxes. The calculation used is your Adjusted Gross Income + Nontaxable Interest + ½ of your SS income. This number is used to determine whether your SS is taxable or not, and by how much.

SS is not taxable below a certain threshold of income. In 2018, the threshold for individuals is $25,000, and the threshold for married couples is $32,000. You pay no tax on SS distributions if your SS combined income is less than your applicable threshold. You are taxed on 50% of your SS income after you exceed the lower bounds and then you are taxed on 85% of your SS after you hit a second threshold. Below are the thresholds:

Single and Head of Household

AGI + Nontaxable Interest + ½ SS


Under $25,000

$25,000 – $34,000




Married Filing Jointly

AGI + Nontaxable Interest + ½ SS


Under $32,000

$32,000 – $44,000




What does this mean for me?

This presents an opportunity. For a certain range of income, you are effectively being taxed on $1.85 for every dollar of income above the highest threshold. This translates to a 12% tax bracket becoming a 22% tax bracket and the 22% tax bracket becoming a 40% tax bracket for creating an additional dollar of income. You will likely never be subject to this 40% tax bracket if you are married due to the way the tax brackets are structured. However, single individuals can easily be in this range if their total taxable income exceeds $38,700.

Now, to be clear, not all of your income is subject to these doubled rates. This only occurs for a certain range of income. After a point, your SS is fully taxed and your tax bracket drops back down to your regular level. For example, if you are married and have $100,000 of taxable income (of which $34,000 is taxable SS benefits), your SS was taxed on your income range of $32,000 to $72,000.

This is why planning multiple years in advance is so critical. It isn’t feasible to create a plan a few years before retirement to avoid this doubled taxation of SS if you have only saved in your 401(k). Managing your taxable income in retirement is a process that starts as soon as you begin saving. Every dollar you save in a tax-deferred account versus a post-tax account affects your tax situation in retirement. You may end up paying more in taxes than you saved if you put money into a tax-deferred account now and then take the money out at the doubled SS tax bracket later.

What can I do?

The first step is to see if this will actually affect you. There is no opportunity here if you will retire and solely rely on SS for your income needs. There is also no planning opportunity for people who have spending needs that make it infeasible to have taxable income at these levels. For the married couple example above, it is likely not feasible to bring the taxable income of that couple down by $28,000 just to save money on SS taxes. If your spending in retirement will be around $3,000 – $7,000 per month in today’s dollars, then it is time to make a plan.

Contact us if you would like to explore the options for creating a tax-efficient distribution plan and creating income at various stages of your life when you are most likely to have lower tax brackets.


Written by Garrett Gould

Garrett Gould is a remote financial planner who specializes in long-term tax management. He is the co-owner of Halyard Financial and advises individuals, families, and small business owners throughout the nation. Garrett is an Enrolled Agent with the IRS who has passed all three of the CFA exams and has been creating financial plans for several years. Garrett is located on the Upper West Side in New York City.