Social Security retirement benefits are a cornerstone of many retirement plans. The monthly payments are dependable, continue for life, and adjust with inflation, thanks to cost-of-living increases. For people who expect to live a long life, that inflation-protected lifetime income can be valuable.
However, the rules and choices involved with claiming those benefits are not as straight-forward as they might seem. It’s a complex system, and the rules can be hard to decipher.
One of the most common questions about Social Security income is regarding taxes. Once you start receiving Social Security Income Benefits, how are they taxed? For those in a high tax state like California, the natural follow-up question is, how is Social Security taxed in California?
Social Security Retirement Benefits 101
Let’s start with the basics. Social Security Income benefits are paid to U.S. workers with at least forty (40) quarters of qualifying work history. How much you get paid is based on your income in 35 of your highest earning years, adjusted for inflation.
How much benefit you get is also based on what age you start collecting benefits. Most retirees start collecting at the “Full Retirement Age” of 66 to 67, however you can start collecting benefits as early as age 62. For every year you postpone taking Social Security (up to age 70), your benefit increases by up to 8% more in future monthly payments.
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How Social Security Retirement Benefits are Taxed
Once you start collecting Social Security income benefits, it counts as income on your U.S. federal tax return just like any other income source. However, how much of that income is taxable depends on your “Combined income” and your filing status.
Combined Income is a figure used on the tax return. It adjusts your Adjusted Gross Income (AGI) for things like non-taxable interest income and removes half of your Social Security Income. [LS1] [LS2] Your tax filing status affects how much of your Social Security income benefit is taxable. For example, in 2024, married taxpayers filing jointly with a combined income over $44,000 will pay tax on up to 85% of their Social Security benefits.
There are calculators available online to figure out the exact amount of your benefit that will be taxed, but the easy rule of thumb is that if you make more than $70,000, it’s a safe assumption that most of your Social Security benefits will be taxable on your Federal Income Tax Return.
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What About California State Taxes?
The good news, at least for those living in California, is that California does not tax Social Security Retirement Income benefits. In fact, most states do not tax Social Security income benefits and most of the states that do have some kind of reduction or exemption for at least some of that income.
What about Social Security Disability Benefits?
Disability benefits are an entirely different story. Social Security Disability Insurance (SSDI), like the retirement income program, is funded by payroll taxes and designed to support workers who become disabled before retiring. These benefits are not generous, but they do help cover basic needs for people who are unable to work. The criteria to qualify are complex, as is the calculation for how much you can receive. Like the retirement income program, it’s generally based on your work history, but capped at a certain amount.
SSDI benefits become taxable on your U.S. federal tax return once half of your benefits, plus all of your other income, exceeds a certain amount. For Single taxpayers, this threshold is $25,000. For married taxpayers filing jointly, it’s $32,000. Like the retirement income benefits, once you hit that taxability threshold, up to 85% of your SSDI benefits may be taxed, again depending on your filing status and how much total income you earned.
Social Security Disability Insurance is exempt from state taxes in California.
Social Security and your Retirement Plan
Choosing the right time to start Social Security is one ingredient in a successful retirement plan. However, successful retirement planning requires a thoughtful and multifaceted approach. Leveraging employer-sponsored plans like 401(k)s, tax-advantaged accounts like HSAs and IRAs, and considering additional investment avenues are essential steps in building a strong retirement plan.
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