Educational information, not individual financial advice.
Key Takeaways
When Social Security was created in 1935, benefits were completely tax-free. That changed in 1983 (50% taxable above a threshold) and again in 1993 (up to 85% taxable at higher thresholds). The thresholds haven't been adjusted for inflation since then, so more and more retirees are subject to taxation each year.
Social Security taxation is based on a specific figure called "combined income" or sometimes "provisional income":
Combined income = AGI + tax-exempt interest + 50% of Social Security benefits
This definition is peculiar — it includes half of the Social Security benefits to determine if those same benefits should be taxed. But that's the rule.
These thresholds are low by modern standards. A retired couple with $40,000 of Social Security and $20,000 of pension income has combined income of $40,000, well above the 50% threshold.
The "up to 50%" and "up to 85%" language is important — it's not a flat percentage.
50% phase: For every $1 of combined income between $32,000 and $44,000 (MFJ), $0.50 of benefits becomes taxable.
85% phase: Beyond $44,000, for every additional $1 of combined income, $0.85 of benefits becomes taxable, up to 85% of benefits total.
This creates the "tax torpedo" — marginal tax rates in certain ranges can be very high because each additional dollar of income causes $0.85 of benefits to also become taxable.
Consider a retiree in the 22% federal bracket whose Social Security is already partially taxed:
The torpedo can make effective rates 40%+ for retirees nominally in the 22% bracket.
Roth conversions before Social Security starts. Roth conversions in ages 60–67 (before claiming) increase AGI in those years but eliminate future RMDs that would drive up combined income. Done right, more Social Security stays untaxed.
Manage taxable vs Roth withdrawals in retirement. Roth withdrawals don't add to AGI or combined income. A retiree living off Roth and Social Security alone can keep taxation of benefits minimal.
Tax-efficient investment placement. In taxable accounts, favor tax-efficient index funds (low distributions) over bonds and REITs (which generate ordinary income).
Deferred income. If you have control over when to recognize income (sale of a business, realizing gains, Roth conversion), spread it across years to avoid spiking combined income in any single year.
Harvest losses in taxable accounts. Capital losses up to $3,000/year reduce AGI, which can partly offset the 50%/85% thresholds.
Most states exempt Social Security benefits from state income tax. Those that don't, as of 2025 (rules change):
California, notably, does NOT tax Social Security benefits despite taxing most other retirement income.
The thresholds ($32k MFJ, $25k single) were set in 1983 and 1993. They were never indexed to inflation. The original intent was to affect only higher-income retirees. Today, because of inflation, a much larger fraction of retirees cross the thresholds.
Various proposals to raise the thresholds have been introduced in Congress but haven't passed. Planning should assume the current structure holds.
Horizons calculates Social Security taxation each year based on your projected AGI, tax-exempt interest, and Social Security benefits. The tax torpedo is modeled explicitly — the engine knows that adding income can raise Social Security taxation. This is important for Roth conversion planning, because the torpedo can shift the math meaningfully.
Try this next
Social Security Basics
More related reading