The formula that determines the taxation of benefits applies to everyone, regardless of age. If you look at a 1040 tax form, you will see two boxes; box 6a, for total Social Security benefits, and box 6b, for the taxable amount. Here’s how the taxable amount is determined.

Step 1: Determine What Your Combined Income Will Be

Do you have income in addition to Social Security? Additional sources of income that would show up on your tax return include items such as:

Wages (earnings or self-employment income)Investment income from interest, dividends, and/or capital gainsPension or annuity incomeIRA, 401(k), and/or 403(b) withdrawalsRental property income

Social Security defines your “combined income” as the total of your adjusted gross income plus nontaxable interest, plus one-half of your Social Security benefits. Roth IRA withdrawals do not count as combined income, but municipal bond interest does. Your combined income is compared to the threshold amounts in the table below.  If your combined income exceeds the first threshold amount, then a more complex formula is used to determine what portion of your benefits will be taxable (up to a maximum of 85%).

Step 2: Plug Your Combined Income into the IRS Social Security Worksheet

If your combined income exceeds the threshold amounts, an IRS formula is applied to determine how much of your benefits are taxable. The result of these calculations is that you will pay taxes on the lowest of:

85% of your Social Security benefits50% of the benefits plus 85% of the amount of combined income over the second threshold amount50% of the amount of combined income over the first threshold amount, plus 35% of the amount of combined income over the second threshold amount

Example: Social Security Taxation for Married Couples

Let’s look at an example for a couple, both age 67, who are married and file jointly in 2022. One is collecting a spousal Social Security benefit. They are both waiting until age 70 to claim their full retirement benefit amounts, so they can get the most possible. While delaying, they are taking large withdrawals from a traditional IRA. Here’s a snapshot of their income sources.

$10,000 gross Social Security income$50,000 IRA withdrawal 

The first step in the process is to calculate their provisional income. This is done by taking 50% of their social security benefit and adding it to your other sources of income; the IRA withdrawal in this case. Based on the first step, this makes their combined provisional income $55,000 ($10,000 x .50 + $50,000, which exceeds the highest threshold amount for married couples filing jointly). Using the Social Security taxation calculation in step two above, 85% of their Social Security will be taxed, or $8,500 that will be input to box 6b. They do not itemize deductions but instead use the standard deduction and exemptions for 2022.

Their adjusted gross income (AGI) is $58,500Their standard deduction is $25,900Additional deduction for both spouses being over age 65 is $2,800Taxable income is $29,800Total tax due is $3,576After-tax funds available to spend = $54,924 (assuming no state tax)

Now let’s look at this same couple three years later. Both are age 70 and receiving their full Social Security amounts. Here’s a snapshot of their income sources.

$40,000 gross Social Security income$20,000 IRA withdrawal

Their provisional income is $40,000 ($40,000 x .50 + $20,000). This figure is between the threshold amounts for married couples filing jointly. Using a free online Social Security calculator, we see that 50% of their Social Security will be taxed, or $20,000 to be input to box 5b. They do not itemize deductions but instead use the standard deduction and exemptions.

Their AGI is $40,000 ($40,000 x .50 + $20,000).Their standard deduction is $25,900.Additional deduction for both spouses being over age 65 is $2,800.Taxable income is $11,300.Total tax due is $1,356.After-tax funds available to spend = $58,644 (assuming no state tax).

In both years, the couple has $60,000 of gross income. However, after they are both age 70 and because a larger proportion of their income will come from Social Security, their tax liability will go down, and they will have more funds to spend.

How to Use Tax Arbitrage to Your Advantage

If you design a retirement income plan that takes advantage of this tax arbitrage, it can make a big difference over the course of your retirement years. You can pay less in tax and have more to spend. There are many ways you can plan to reduce taxes when you begin withdrawing money. The most common strategy is to delay the start of your Social Security benefits to age 70 while taking IRA withdrawals or using Roth conversions in your 60s. It isn’t the best option for everyone, but for many families, this approach results in less total taxes during retirement years. Much of this planning has to do with how other sources of income will affect how much of your Social Security benefits will be taxable. By planning out the timing of those other sources of income, many people can lower their tax bill. The Balance does not provide tax, investment, or financial services and advice. Readers should consider engaging a financial professional to determine a suitable retirement savings, tax, and investment strategy.