Retired taxpayers who receive Social Security benefits are often exempt from federal income tax on their benefits. However, in some cases, individuals may have to pay tax on part of their benefits. In addition, those who receive Social Security benefits may still be liable for federal income tax on other types of income, such as retirement distributions and bank interest.

Does the IRS Tax Social Security Benefits?

To put it simply, the IRS taxes some Social Security benefits, but not all benefits or all taxpayers. According to the IRS code, the majority of individuals who receive Social Security benefits are not subject to income taxes. Depending on their total income, though, some may be required to pay taxes on part of their annual benefits.

How Much are Benefits Taxed?

The IRS uses "combined income" to figure the amount of Social Security benefits that are subject to income tax. Combined income refers to the amount of adjusted gross income, the non-taxable interest received during the year, and half of the total benefits from Social Security. Once this amount is determined, those who have less than $25,000 in combined income are exempt from tax on their benefits.

Single people who have a combined income of between $25,000 and $34,000 must pay tax on half of their benefits. For married couples, the income range is between $32,000 and $44,000. If your combined income is higher than these thresholds, you'll have to pay tax on 85 percent of your Social Security benefits.

How to Reduce Taxes on Social Security Benefits

A good way to reduce your taxes on your benefits is to live on a smaller income. As long as your combined income falls below the minimum threshold, you won't have to pay taxes on your benefits at all. If you can pay off your major debts before retirement, you may be able to live on a smaller income without making any real life changes.

If you realize that your benefits will be taxable, you can reduce your tax time payment by opting for tax withholding during the year. Use IRS Form W-4V to determine how much federal tax you'd like deducted from your benefits each month.

In summary, some taxpayers may have to pay federal income tax on part of their Social Security benefits. However, these benefits are never fully taxable. If you fall into the income category that requires you pay federal taxes on your benefits, speak with a qualified finance professional who can help you lower your tax liability for next year.