What Do You Mean There Could be a Tax on Social Security?
Retires can actually have to pay income tax on social security benefits
As a tax preparer, I have had more than one taxpayer express surprise (outrage?) over the fact that their social security income would actually be taxable. A married couple, both over age 62 and collecting social security benefits, who, in addition to some interest income and a small pension, continued to both work part-time. Despite having tax taken out of their paychecks and the pension, with the inclusion of part of their social security benefit as taxable income, they owed over $1000 dollars!
Most retired people believe that their social security benefit is tax-free. For the most part, and for many retirees, this is true, especially when social security is their only source of income. These retirees may not even have to file a tax return. Supplemental security income payments (SSI) are not taxable.
But, add a pension or an IRA distribution and combine it with some taxable or even tax-free interest and mix in some dividends, capital gains, or earned income, then, depending on your filing status, your social security benefit may become taxable. The amount of your social security benefit that is taxable depends on your total income and filing status. Up to 85% of your social security benefit may be included as taxable income on your income tax return. Not only may it be taxable, it could even push you into a higher tax bracket!
Note: YouTube video from the IRS website.
To Estimate if some of your Social Security Benefit may be Taxable:
1. Add together all of your income, including earned income, distributions from pensions, 401(k)s, IRAs, taxable and tax-exempt interest, dividends, capital gains, and also include items usually excluded from income such as interest on savings bonds or foreign earned income.
2. To the total from #1 add 1/2 of the total social security benefit you (and your spouse if filing jointly) received (as reported on a form SSA-1099).
3. If the total of #1 and #2 exceeds the following base amounts:
a. $32,000 for married couples filing jointly
b. $25,000 for single, head of household, qualifying widow/widower with a dependent child or married individuals filing separately who did not live with their spouse at any time during the year.
c. $0 for married persons filing separately who lived together during the year.
If your total exceeds the base amounts, a portion of you social security benefit will be taxable, usually up to 50%.
But, up to 85% may be taxed if the total of your base amount exceeds $34,000 for singles and $44,000 for married and filing jointly.
Save yourself a tax bill at tax time.
If you owe tax on a portion of your social security benefit, you can save yourself a tax bill at tax time. In addition to having tax withheld from your paycheck, pension or IRA distribution, you can have tax withheld from your social security benefit. Complete a Form W-4V Voluntary Withholding Request and file it with the Social Security Administration.
For more information, see IRS Publication 915, Social Security and Equivalent Railroad Retirement Benefits.
Tax diversification can reduce your tax liability in retirement and potentially decrease the portion of your social security benefit subject to income tax.
Any federal tax or tax planning information provided above or linked to this article is not meant to be specific to any particular individual or situation. Anyone who wishes to apply this information should first discuss it with their accountant or tax professional to determine its appropriateness or how it specifically applies to their unique situation.
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