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A recent post about the taxation of Social Security (SS) benefits provided an example of the complexity of the way that SS benefits are taxed, and how they interact with other sources of income. I’ve read innumerable articles on this complexity, and experienced it first hand while preparing hundreds of tax returns for AARP TaxAide. Clients were frequently surprised and confused by this.
The referenced post’s example posits a couple, 65+, MFJ tax status, with $50,000 in combined SS benefits. The Dinkytown 1040 calculator shows that the couple could have $31,162 of other taxable income and still have $0 taxable income. This is partially due to the additional senior deduction of $12,000 implemented in 2025. In 2026, the senior couple has a total deduction of $47,500 ($35,500 standard and $12,000 senior deduction). The couple’s maximum taxable SS benefit is 85% of the $50,000, or $42,500. Since this is less than their total deduction, no amount of a Roth distribution included in the SS taxability formula would have any impact on the couple’s tax.
I then considered how a significantly larger combined SS benefit would behave. The maximum SS benefit in 2026 is $5,181 per month, or $62,172 per year. The combined couple’s maximum benefit would be $124,344. The maximum taxable amount of their SS is 85% of this, or $105,692. If the couple’s only income was their SS benefits, the taxable amount of their benefits would be $21,446, or 17%. This is well below their deduction, so their tax would be $0. They could have up to $14,083 in additional taxable income and still have the $47,500 deduction wipe out any tax. That’s $138,247 in income with no tax. If the entire $138,247 were an IRA distribution, they would pay $10,415 in tax.
To reach the maximum 85% of their benefits being taxable, they would have to have $99,150 in other income. At that amount of income ($223,494) they would have a tax bill of $25,847.
I also wondered how long-term capital gains (LTCG) would impact the couple’s tax. LTCGs have preferred tax rates, including a 0% rate for taxpayers in the lower brackets. Consider a scenario with the original $50,000 of SS benefits and $100,000 of other forms of income – Traditional IRA distribution, Roth IRA distribution, and LTCG. Per the Dinkytown calculator, this is how the tax would be calculated for the 3 cases.
1) $100,000 Trad IRA Distribution – $42,500 Taxable SS, $95,000 taxable income, $10,907 tax.
2) $100,000 Roth IRA Distribution – $5,250 Taxable SS, $0 taxable income, $0 tax.
3) $100,000 LTCG – $42,500 Taxable SS, $95,000 taxable income, $0 tax.
Case 3 is interesting because it demonstrates that moving the $95,000 of taxable income into the LTCG category saves the taxpayer $10,907. I used this concept when managing my mother-in-law’s finances. Her dementia diagnosis caused most of her memory care expenses to be qualified medical expenses, thus giving her a significant amount of itemized deductions. This allowed us to withdrawal funds from her Trad IRA tax free, and to later harvest some LTCG tax free.
Excellent analysis. Thanks for your work. As Dan points out, you highlight the importance of tax planning to a financially healthy retirement.
Thanks Edmund. During my CFP classes we reviewed a paper that demonstrated that a well executed tax strategy could add up to 2 years to a retirement portfolio’s life. That made an impression on me.
Rick, your post illustrates how a good tax preparer can help you with more than just the current year’s Form 1040. I think of all these different types of income sort of like a big dance; you need to be careful who you go home with at the end of the night. A good tax preparer can help you pick the right partner; Traditional, Roth, non-qualified brokerage, as well as which investments belong in each bucket in order to minimize taxes in retirement. Similar to saving money for the future, it’s good to begin retirement tax planning at an early age.
Dan, you are right on. One of the challenges with TaxAide is you get minimal time with clients, and there are often ways you could help people who really need good advice. There are very good tools out there (like Dinkytown, AI, and many others) but I find many folks hate the topic.
I agree, Rick. My younger clients had little to no interest in tackling the topics of taxes or financial planning. An exception was if they had a large balance due, in which case they’d panic and want to avoid a repeat the following year.
Thanks Rick,
Our effective tax rate for 2025 was 18%. Could I have done better being more tax aware? Maybe, not sure. But an effective tax rate of 18% doesn’t upset me. I set things up so I always get a refund, not optimal efficiency I suspect, but it makes me feel better in March😎
I use the standard deduction, tax-free municipal bonds and QCDs, but other than that I am at the mercy of the IRC …and the Social Security law🤑
Those of us lucky to have a good pension will likely never have to worry about calculating the percentage of our SS benefits that are taxable. I just assume 85% for planning. My interest in financial and tax planing during retirement really came from taking care of my parents finances, and then my in-laws and my wife’s aunt. My parents had very little, so it was more about squeaking every last dollar. My in-laws were well prepared, but my mother-in-law had significant longevity in her genes. When she developed dementia and required expensive care, it made sense to try to manage her finances as tax-efficiently as possible. With my wife’s aunt, who also had dementia, it was more about finding lost assets, simplifying her assets, and protecting her.
I guess I feel the same sense of concern for the TaxAide clients. It’s hard to break old habits.