It's not that big of a leap to assume that the money you've paid into Social Security — the money taken from your wages or earnings and set aside by the government to pay back to you to help in your twilight years — would be untaxed. You earned it, after all, and it can feel suspiciously like being taxed twice: once when you earn the money and once when you get the money back. You probably wouldn't be surprised to know this is an area of some heated debate.
But we're not here to change tax law or make stump speeches. Instead, we want to get down to the basics. Is all Social Security going to be taxed as income when we use it?
Just like paying taxes twice, that answer probably feels wholly unsatisfying. But not everyone uses Social Security the same way, and that means Uncle Sam doesn't always tax it the same way. So here's one condition: If your only income is Social Security, it's probably not taxable. But if you have income beyond Social Security, you might have to start paying taxes on those checks every month.
It's all about your combined income. Combined income, in this case, means something pretty specific: your adjusted gross income and nontaxable interest, plus half your Social Security benefits [source: SSA]. File as an individual with a combined income of $25,000 - $34,000, and you might be taxed on half your Social Security. If your income is above $34,000, you could be taxed on up to 85 percent of your Social Security income. The good news is that nobody has to pay taxes on more than 85 percent of their Social Security, no matter what kind of money you're hauling in. If you want to avoid paying taxes on your Social Security, you're charged with trying to keep that income below $25,000 a year (or $32,000, if you're a married couple filing jointly). Keep in mind you can also withdraw from some IRAs, CDs and savings accounts without affecting your combined income [source: Udo].
If Social Security is your only source of income, it only gets better for you. Not only do you not have to pay taxes on the benefits you receive, you probably get to skip filing a return at all.