The Dirty Little Secret of Social Security Taxed in Montana

We are hip-deep into the tax season now, and for years I have heard the laments on talk radio.

"The state is taxing my Social Security benefits."

"It's my only income, and Montana is taking some of my hard-earned money away."

I've always been a little dubious about this claim, so I recently visited my CPA & tax accountant and brought up the subject.  She explained that Social Security can have add-ons and subtractions, depending on each individual's circumstances.  It's very complicated.  But she revealed why benefits may be taxed.

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Here's the dirty little secret of Social Security taxed federally and in Montana:

IT IS NOT THE TAXPAYER'S ONLY SOURCE OF INCOME!

State and Federal income tax is determined on the total amount of income an individual or a family receives.  If Social Security was truly the only source of income, it wouldn't be touched at all for taxes.  But throw in distributions from a traditional IRA, 401K and/or pension, income from part-time work, side hustle or small business, and that total income rises.

For a single individual or head of household, if the total combined income is between $25,000 and $34,000, up to 50% of the S.S. benefits are taxable.  If over $34k, then up to 85% is taxable.

For joint returns with total income between $32,000 and $44,000, again 50% of the benefits is taxable.  If that total is over $44k, then 85% of the benefits is taxable.

So there's the unspoken other half of the taxpayers' message.  Because they could have multiple income streams in retirement, Social Security is vulnerable to taxes.

So the next time you hear someone bellyache about their Social Security getting taxed, the first question should be:

"What other income do you receive?"

They may suddenly get really quiet.