During your working days, you pay Social Security tax in the form of withholding from your salary or self-employment tax. When you start receiving Social Security benefits, you may be surprised to learn that some of the payments may be taxed.
How Much of Your Social Security is Taxable?
Your Social Security benefits can be taxed between 50% and 85% if your total income is above a certain amount.
Important: This doesn’t mean you pay 50% to 85% of your benefits back to the government in taxes. It means that you have to include 50% to 85% of them in your income subject to your regular tax rates.
Will I Pay Taxes on Social Security Benefits?
According to the Social Security Administration, if you file as an individual and have a combined income less than $25,000 your benefits will not be taxed. For those filing a joint return, you will only pay taxes on your benefits if you make a combined $32,000 or more.
How to Calculate Your Combined Income
To calculate your income for social security benefit tax purposes, start with your adjusted gross income on you tax return. Then, you add certain amounts (for example, tax-exempt interest from municipal bonds). Add to that the income of your spouse, if you file jointly. To this, add half of the Social Security benefits you and your spouse received during the year. The figure you come up with is your provisional income. Now apply the following rules:
Individual Social Security Benefit Taxation Rules
- For single taxpayers, if your provisional income is between $25,001 and $34,000, you must report up to 50% of your Social Security benefits as income.
- If your provisional income is more than $34,000, the general rule is that you must report up to 85% of your Social Security benefits as income.
Joint Social Security Benefit Taxation Rules
- For those filing jointly, if your provisional income is between $32,001 and $44,000, you must report up to 50% of your Social Security benefits as income.
- If your provisional income is more than $44,000, and you file jointly, you must report up to 85% of your Social Security benefits as income on Form 1040.
Caution: If you aren’t paying tax on your Social Security benefits now because your income is below the floor, or you’re paying tax on only 50% of those benefits, an unplanned increase in your income can have a significant tax cost. You’ll have to pay tax on the additional income, you’ll also have to pay tax on (or on more of) your Social Security benefits, and you may get pushed into a higher tax bracket.
For example, this might happen if you receive a large retirement plan distribution during the year or you receive large capital gains. With careful planning, you might be able to avoid this tax result.
Avoid a Large Tax on Social Security Benefits
If you know your Social Security benefits will be taxed, you may want to voluntarily arrange to have tax withheld from the payments by filing a Form W-4V with the IRS. Otherwise, you may have to make estimated tax payments.
Contact us to help you with the exact calculations on whether your Social Security will be taxed. We can also help you with personal tax planning to keep your taxes as low as possible during retirement.