When is the best time to take Social Security and how is it taxed?

Much anticipation has surrounded Social Security and whether or not it is taxable under the “Big Beautiful Bill.” Contrary to what you may have heard, the “BBB” did not address the taxation of Social Security on the Federal level. For some, Social Security won’t be taxable, for others 50% of their benefit will be subject to taxation and the rest will see 85% of their benefits taxed. 15% of your benefit is always tax free. In this blog post I am referring to Social Security Old Age benefits only.

How you can determine if your Social Security Benefit will be taxable:

If your income is over $25,000 calculated by AGI + tax exempt interest (such as municipal bond interest)+ ½ of your Social Security Benefit.

$32,000 if you are married filing jointly.

50% of your benefit is taxable if using the calculation above your income is $25,000 to $34,000 or $32,000 to $44,000 for married filing jointly.

If you find yourself over these numbers 85% your Social Security Benefit would be subject to taxation.

Key point, the actual taxes you then would pay would be dependent on the rest of your income and other deductions. For instance the new “Senior” tax deduction from the “BBB” could be $6,000 further reducing the taxes on your Social Security Benefit. Income limitations apply for this benefit as well. If MAGI is $75,000 or less you can deduct the full $6,000 if 65 or over and $150,000 for married filing jointly. The deduction phases out between completely at $175,000 for single and $250,000 for joint. This is in effect for 2025 to 2028. This deduction is in addition to the standard deduction of $15,750 + $2,000 regular senior deduction. Double if married filing jointly. That's a total of $23,750 in deductions for single and $47,500 for married filing jointly. This would mean that if you qualify for all these deductions your first $47,500 of income in 2025 is tax free if 65 or older and married filing jointly.

Definitions: AGI stands for Adjusted Gross Income. It is a measure of income used by the IRS to determine how much of your income is taxable.

AGI = Gross Income − Adjustments to Income

• Gross Income includes wages, dividends, capital gains, business income, retirement distributions, and other income.
  
  

• Adjustments (also called "above-the-line deductions") can include:
  
  

  • Contributions to a traditional IRA

  • Student loan interest

  • Educator expenses

  • HSA contributions

  • Self-employment tax deductions

  • Alimony paid (for divorces finalized before 2019)

MAGI = AGI plus:

• IRA contributions

• Student loan interest

• Foreign earned income and housing exclusions 

• Foreign housing deduction or income exclusion 

• Savings bond interest excluded from your income 

• Adoption benefits excluded from your income 

Now let’s talk about the timing of Social Security.

Many factors contribute to the “best” time to take Social Security including the unknown of when you will pass away. Let’s assume you live to your life expectancy for the sake of argument.

To save you the brief read, I find for most people, delaying to age 70 results in the highest expected benefit from Social Security and the biggest impact on retirement spending overall. A secondary strategy would be for the spouse with the higher benefit to delay to 70 and the other to take at their full retirement age, likely to be 67.

Social Security's Core Purpose

Let’s take a step back and understand what Social Security is designed for. At its core, Social Security is intended to provide a financial safety net, preventing poverty for those who can no longer work. It offers a guaranteed monthly payment from the time benefits start until death. Additionally, spouses and sometimes minor children may also receive benefits upon the recipient's passing. An annual Cost of Living Adjustment (COLA) is included, ensuring that monthly benefits can increase with inflation, providing vital protection in retirement.

Why Taking Social Security Early Might Be Costly

Taking Social Security early, such as at age 62, can have drawbacks. Firstly, the monthly benefit is smaller compared to waiting. While receiving benefits sooner may seem appealing, the advantages often end there. If you are still working, you may face penalties for earning too much income while receiving Social Security.

For 2025, if you earn more than $23,400 and are receiving benefits before your Full Retirement Age (67 for most people today), your monthly benefit is reduced $1 for every $2 you earn above the limit, and then $1 for every $3 over $62,160. Additionally, As noted earlier your Social Security benefits can indeed be taxed as well.

Simply put, if you're still working, your Social Security deposits may be smaller than expected due to both penalties and taxes.

Benefits of Delaying Social Security

Delaying Social Security until your Full Retirement Age (FRA) means receiving your full benefit without the earned income penalty. Furthermore, for every year you delay beyond your FRA (up to age 70), your benefit increases by 8% per year, guaranteed. This is a significant return that is hard to find elsewhere.

Delaying until age 70 can result in a substantially higher monthly benefit. Consider the impact of the cost of living adjustment (COLA): if inflation is 5%, a $50,000 annual benefit at age 70 increases by $2,500 per year, while a $30,000 annual benefit taken earlier would only increase by $1,500.

Many financial plans show that delaying Social Security is a critical factor in avoiding running out of money in retirement. This is particularly important for the higher earner in a couple, as the surviving spouse keeps the higher of the two benefits, providing long-term protection.

Does Delaying to Age 70 Mean I Need to Work to Age 70?

No. So where will my income in retirement come from? Your investments. Social Security is only a supplement to your retirement income, in fact on average it only covers about 40% of peoples pre-retirement income. In between the time you retire and when you collect Social Security you can lean on your investments, then when you start collecting you can reduce the amount of withdrawals by what you get from Social Security. Your Social Security FRA is just a number, when you are able to retire is a product of what your income needs are and what your investments and income sources can produce. Some people are prepared to retire at 50 and others are not yet ready at 70.

Additionally, retiring prior to taking your Social Security benefit also gives you the freedom to have more control over your income, and thus the taxes you pay.

You could take advantage of the new “Senior” tax deduction combined with the standard deductions and “old Senior Deduction" to pull out up to $47,500 from your pre-tax IRA or 401(k) tax free if you are married and filing jointly. 

If you have substantial money in cash savings it could mean using your deductions laid out earlier and your low income to do Roth Conversions. If you are not familiar, that means taking pre-tax money from your 401(k) or IRA and depositing (Converting) to your Roth which would allow that money to then grow tax free and be withdrawn tax free in the future. Important note. Before you try a Roth conversion consult your tax pro and financial advisor to make sure it makes sense for you and is executed correctly.

These are just a couple of examples to get you thinking. 

Key Considerations

Social Security is meant to provide a financial safety net, and for many, delaying can significantly enhance its value, sometimes adding hundreds of thousands of dollars in projected lifetime benefits. However, delaying is not always the right move for everyone.

The information in this blog is the opinion of Nathan Tomkiewicz and does not reflect the views of any other person or entity unless specified. The information provided is believed to be  reliable and obtained from reliable sources, but no liability is accepted for inaccuracies. The information provided is for informational purposes and should not be construed as advice. Advisory services offered through Tomkiewicz Wealth Management, LLC, an investment adviser registered with the State of New