Key Takeaways
This fall a retired client stopped me in the middle of his annual review with a question that deserves its own blog post: Wait. Social Security, that's not taxed, right? He asked it the way you'd ask whether the sky is blue, and I understood why, because he'd been paying into the system since the Carter administration and nobody mentions the fine print at the retirement party.
The answer I gave him is the answer most retired couples get, which is that a good chunk of his benefit was indeed showing up on his federal return, and had been for years. So let's walk through how that math actually works, why it surprises so many people, and the piece of good news waiting for those of us filing in New Jersey.
The IRS doesn't tax your whole benefit, and it doesn't ignore it either. Instead it runs a little formula called combined income: take your other income (pensions, IRA withdrawals, wages, interest, dividends), add any tax-exempt interest, then add half of your Social Security benefit, according to the IRS's guidance on Social Security taxation.
By the Numbers: For single filers, combined income between $25,000 and $34,000 means up to 50% of benefits can be taxable, and above $34,000 it's up to 85%. For married couples filing jointly, the bands are $32,000 to $44,000, then above $44,000. Source: IRS, irs.gov.
"Up to 85% taxable" does not mean you pay an 85% tax, and that one distinction clears up most of the confusion I see in my office. It means up to 85% of the benefit gets added to your taxable income, where it's taxed at your ordinary rate like a pension would be. A couple in the 12% bracket with 85% of their benefit included is paying roughly a dime on each Social Security dollar, which is real money, but a very different animal than the headline makes it sound.
The part that turns a quiet rule into a yearly surprise is that those thresholds never move. Congress set the first tier in 1983 and the second in 1993, and neither has been adjusted for inflation since. Benefits rise with cost-of-living adjustments, pensions and RMDs push income up over time, and the goalposts just stand there, which means every year a new wave of retirees crosses a line that was drawn when gas cost about a dollar.
That's also why the couple I sat with this fall was at the full 85%. Between a pension, IRA withdrawals, and two Social Security checks, their combined income sailed past $44,000 without anyone doing anything exotic. For most retired couples with any meaningful pension or IRA income, the 85% tier is simply where life happens.
You may have heard that the 2025 tax law ended taxes on Social Security, and I want to be precise about what actually changed, because the details matter on a tax return. The law did not touch the combined-income formula above. What it created is a new deduction: $6,000 per person for taxpayers 65 and older (so $12,000 for a couple where both qualify), available from 2025 through 2028 whether or not you itemize, per the IRS's Working Families Tax Cuts summary.
Watch Out: The senior deduction starts shrinking once modified adjusted gross income passes $75,000 for single filers or $150,000 for joint filers, and it's scheduled to sunset after 2028. For many middle-income retirees it meaningfully lowers the tax on their benefits. For others, especially above the phaseout range, it changes nothing. A deduction that lowers your taxable income is a good thing, and it is not the same thing as Social Security becoming tax-free.
Our home state gets plenty of grief about taxes, so let's give credit where it's due. New Jersey does not tax Social Security benefits, full benefit, every year, no thresholds, according to the New Jersey Division of Taxation. If you're comparing a federal return to a New Jersey return and wondering why the numbers look so different, that's a big piece of the answer.
The reason I care about this formula goes beyond trivia night. Because Social Security taxation is driven by your other income, the decisions we make together, how much to pull from the IRA, when to realize gains, whether this is a conversion year, directly change how much of your benefit gets taxed. Pull an extra dollar from the IRA and it can drag some Social Security along with it into taxable income, so the real tax cost of that dollar is higher than it looks. Planners have a nickname for that effect, the tax torpedo, which is dramatic, but the fix is ordinary: we map your income sources on purpose, year by year, instead of letting the formula ambush you every April.
Three Things Worth Doing Before Year-End:
1. Look at last year's return, lines 6a and 6b of your Form 1040, and see how much of your benefit was actually taxed. Most people have never looked.
2. If you're 65 or older, make sure the new senior deduction is reflected in your withholding or estimated payments for this year.
3. If you're planning IRA withdrawals, gains, or a Roth conversion before December 31, size them with the combined-income formula in view rather than finding out in April.
At Sound Wealth this is exactly the kind of moving part we coordinate, and come filing season, Sound Tax is the one making sure the return matches the plan. If you've never actually seen how much of your benefit is being taxed, or you'd like to, we'd be glad to walk through it with you.
Federally, yes, up to 85% of your benefit can be included in taxable income depending on your combined income (other income plus tax-exempt interest plus half your benefit). New Jersey does not tax Social Security benefits at all.
It means up to 85% of your benefit is added to your taxable income and taxed at your ordinary rate. It does not mean an 85% tax. A couple in the 12% bracket pays about 12 cents of tax on each included dollar.
No. The combined-income formula is unchanged. The 2025 law added a $6,000 deduction per person for taxpayers 65 and older (2025 through 2028), phasing out above $75,000 of income for singles and $150,000 for joint filers, which lowers many retirees' total tax but does not exempt the benefit itself.
No. New Jersey exempts Social Security benefits from state income tax entirely.
Often, yes, because the formula depends on your other income. The timing and size of IRA withdrawals, capital gains, and Roth conversions all move the needle, which is why we plan them together rather than one at a time. Your situation will have its own math, so bring last year's return and we'll look at it with you.
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Disclosure: This content is for educational purposes only and does not constitute personalized investment, tax, or legal advice. Sound Wealth LLC is a registered investment advisor in the states of New Jersey, Pennsylvania, Illinois, and Texas. Advisory services are only offered in states where Sound Wealth is registered or exempt from registration. Please consult your financial advisor, tax professional, or attorney before making decisions based on this information. Past performance does not guarantee future results. All investing involves risk, including the possible loss of principal.