Social Security benefits are an important source of retirement income for many Americans. However, some parts of your Social Security benefits may be taxable, which can reduce the amount you actually receive. Understanding which parts can be “grossed up” (or increased to account for taxes) can help you maximize your retirement income.
What does it mean to “gross up” Social Security benefits?
Grossing up refers to increasing an amount to account for the taxes that will be owed on it. For example, if you need to net (or clear after tax) $1,000 of Social Security benefits, but 25% of your benefits are taxable, you would need to gross up your benefits to $1,333 ($1,000 / 0.75) so that after paying 25% tax on the grossed up amount ($333), you are left with your desired $1,000.
Grossing up allows you to increase your Social Security benefits to account for the taxes you’ll owe on the taxable portions. This results in a higher overall benefit amount.
What parts of Social Security are taxable?
Whether your Social Security benefits are taxable depends on your provisional income (PI). Your PI is your adjusted gross income, any non-taxable interest, and 50% of your Social Security benefits.
If your PI exceeds certain thresholds, then a portion of your Social Security becomes taxable:
- For individuals: if your PI is between $25,000 and $34,000, up to 50% of your benefits may be taxable. If your PI exceeds $34,000, up to 85% of your benefits may be taxable.
- For married couples filing jointly: if your PI is between $32,000 and $44,000, up to 50% of your benefits may be taxable. If your PI exceeds $44,000, up to 85% of your benefits may be taxable.
Any portion of your benefits that exceeds these thresholds can be included in your taxable income and therefore subject to federal income tax (and possibly state tax in some states).
What parts of Social Security can you gross up?
You can only gross up the portions of your Social Security benefits that are taxable based on your PI.
For example:
- If 50% of your benefits are taxable, you can gross up the taxable 50% to account for taxes owed.
- If 85% of your benefits are taxable, you can gross up the taxable 85% to account for taxes.
You cannot gross up the non-taxable portions of your benefits.
So in practice, grossing up primarily applies to higher-income individuals whose provisional incomes exceed the 50% or 85% taxation thresholds. Lower-income individuals with little or no taxable benefits do not have the opportunity to gross up their Social Security.
How much can you gross up your Social Security benefits?
How much you can gross up your benefits depends on your tax bracket and how much of your benefits are taxable. Some examples:
- If you are in the 22% tax bracket and 50% of your benefits are taxable, you could gross up the taxable portion by 22% to account for taxes owed. For example, gross up $10,000 of taxable benefits to $12,200.
- If you are in the 32% tax bracket and 85% of your benefits are taxable, you could gross up the taxable portion by 32%. For example, gross up $30,000 of taxable benefits to $39,000.
In practice, you would increase the taxable portion of your benefits by your marginal tax rate to determine the grossed up amount. This compensates for the taxes owed while maximizing your overall benefits received.
When can you request to gross up your benefits?
Grossing up your Social Security is not automatic – you need to specifically request it from the Social Security Administration.
The best times to request a gross up include:
- During your initial Social Security application: When first applying for benefits, you can request that a certain portion be grossed up based on your estimated provisional income.
- Following your annual tax filing: After filing your taxes each year, you can review your actual PI and taxable benefits amount. If your benefits were undershot, you can provide your tax return and request an adjustment to gross up appropriately.
- Following life changes: If you have a significant change in your income or filing status (e.g. retirement, marriage/divorce, etc.), you can request a redetermination to gross up based on your new situation.
Being proactive allows you to maximize the grossed up benefits you are entitled to. Relying solely on Social Security to adjust can result in leaving money on the table.
Can you gross up pensions or 401(k)/IRA withdrawals too?
No, grossing up applies only to Social Security benefits, not other sources of retirement income.
Pensions, 401(k)s, IRAs, and other withdrawals do not offer the opportunity to gross up. You’ll owe ordinary income tax on any taxable withdrawals from these plans.
Grossing up is specific to Social Security since a portion of those benefits are taxable based on your provisional income. It’s a way to increase your overall Social Security amount received after accounting for any tax owed.
What about state taxes on Social Security benefits?
Some states also tax Social Security benefits if your income exceeds certain thresholds. These state thresholds are often lower than the federal thresholds.
If you live in a state that taxes Social Security, you can perform a separate gross up calculation on the state taxable portion of your benefits.
For example, if 20% of your benefits are taxable for state purposes, you could gross up the state taxable portion by your state income tax rate (e.g. 5%). This would further increase your benefits to account for state taxes owed.
Be sure to understand your state’s taxation rules to determine the appropriate gross up percentage.
Should everyone gross up their Social Security?
Grossing up your Social Security benefits can make sense if you have substantial taxable benefits and want to maximize your income. However, there are some disadvantages to consider:
- It will increase your adjusted gross income and potentially subject you to higher Medicare premiums.
- It may cause more of your Social Security to become taxable in future years.
- It reduces your Social Security worker benefit, which can lower survivor benefits for your spouse if you pass away first.
Weigh these impacts against the tax savings grossing up provides. For many retirees, letting Social Security gradually adjust benefits over time may be the easiest approach. But for higher-income earners, proactively grossing up benefits can be a smart tax planning strategy.
Conclusion
You can request to gross up the taxable portions of your Social Security benefits based on your income tax bracket. This increases your total benefit received after accounting for taxes owed on the taxable percentages.
Be proactive in grossing up your benefits at the time of initial application, after tax filing each year, and following any major life or income changes. Understand impacts to future Medicare premiums and survivor benefits as well. With some planning, grossing up Social Security can help maximize your retirement income.