Social Security has its own set of tax rules and they are not always obvious. A few easy-to-miss mistakes can end up costing you more than you expect when tax time rolls around.
Here are seven things worth knowing before you file.
1. Thinking Your Benefits Are Always Tax-Free
This is one of the most common surprises. The IRS can tax up to 85% of your Social Security benefit if your income is high enough.
Here is how to check. Add half of your annual benefit to your other income: pensions, interest, investments, and the like. If that combined total exceeds $25,000, some of your benefit is taxable. For married couples filing jointly, the threshold is $32,000.
2. Forgetting Your State May Tax Benefits Too
Federal taxes are one thing. Your state is another. According to Fidelity, these nine states may tax your Social Security benefit even if you owe nothing federally:
- Colorado
- Connecticut
- Minnesota
- Montana
- New Mexico
- Rhode Island
- Utah
- Vermont
- West Virginia
If you live in one of these states, a state tax bill could trim your refund.
3. Waiting Until April to Pay
You do not have to wait until Tax Day to settle up. The Social Security Administration will withhold income tax from your monthly benefit at your request. Withholding options range from 7% to 22% of your benefit. You can also make estimated tax payments throughout the year to avoid a big bill in April.
4. Not Accounting for Income Increases
Two things can quietly push your income above the taxable thresholds without you expecting it. One is the annual cost-of-living adjustment to your Social Security benefit. The other is the required minimum distributions the IRS requires you to take from retirement accounts starting at age 73. Either one can nudge your combined income into taxable territory.
5. Mishandling a Lump Sum or Back Payment
The Social Security Fairness Act gave many Americans retroactive increases or back payments for benefits they had previously missed or received at a reduced amount. If you received a lump sum or back payment in 2025, you will report it on your return, but the IRS allows a “lump sum election” that lets you calculate back payments from a prior year separately. That method can lower the amount of tax you owe on those dollars.
6. Claiming Benefits Too Early
Claiming early while you are still working or still earning significant income from other sources can expose your benefits to taxes you were not planning on. There is also a long-term cost. Claiming before full retirement age of 67 permanently reduces your monthly benefit.
On the flip side, waiting past 67 pays off. The Social Security Administration notes that benefits grow by 8% per year for each year you delay, up through age 70.
7. Skipping Tax Planning After You Retire
Retirement does not end the need for smart tax strategy. A little planning around your Social Security benefits can prevent costly mistakes and help your savings last longer. Working with a tax professional after you stop working is worth considering.
