Is Social Security Taxable?

Just because you stop working does not mean you get to stop paying taxes. (If only it were so!) Depending on your combined income, a portion of your Social Security income may be subject to income tax. The government has the ability to tax your Social Security (SS) benefit no matter how old you are if your provisional income exceeds the thresholds below. The table provided outlines the tax structure for Social Security benefits as of 2019.

Social Security Tax Structure

What is Provisional Income?

Provisional Income is your Modified Adjusted Gross Income (MAGI) which includes your household pension, any earned income from employment, taxable TSP or IRA withdrawals, other income items (dividends, interest, capital gains, rental property income, and other taxable income, etc plus half of your Social Security benefit.

Social Security Provisional Income

Social Security Tax ConsequenceFor example, let’s assume that you are on that $44,000 bubble. Quite often, federal employees retire and draw from TSP in addition to their provisional income of $44,000. To celebrate federal retirement, you throw a party in which you take $1 from your traditional TSP.

With these assumptions, you are in the 12% tax bracket. You will owe 12 cents on the dollar for federal tax. Because you took $1 from your traditional TSP, your provisional income now exceeds $44,000. We then add 85 cents of our Social Security dollar to our tax return, you will owe 10 cents on the 85 cents. This creates a total tax consequence of 22 cents! Is this 22% rate higher than what you are paying now?

Just think. Withdrawing from your TSP might create a second tax on Social Security.

Potential Excluded Sources of Income

  • Qualified Dividends
  • Roth IRA & TSP Distributions
  • Non-Taxable Pensions & Annuities
  • Inheritances & Gifts
  • Life Insurance Proceeds

In effect, the withdrawal from the TSP triggers two taxes—the tax on the TSP dollar and a tax on your Social Security that you wouldn’t have had to pay otherwise.

Question of the day

How are you going to control Social Security taxation?

One way to control Social Security taxes is to look carefully at the way you are saving your money now in anticipation of that withdrawal phase and how your withdrawal of assets can positively or negatively affect your Social Security benefits. If you withdrew the $1 from your Roth TSP, you would not owe tax on the withdraw and therefore could have avoided a higher rate. To learn more about the benefits of Roth TSP, click here.

If you stay below the threshold for taxation, you will not see a tax on your Social Security. However, this is rare for federal employees due to their robust pensions.