Friday, May 20, 2022

Do You Have To Pay Federal Taxes On Social Security

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Does Social Security Income Count As Income

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Yes, but you can minimize the amount you owe each year by making some wise moves before and after you retire. Consider investing some of your retirement savings in a Roth account, to shield your withdrawals from income tax. Take out some retirement money after you’re 59½ but before you retire, to take care of the taxes before you need the money. And, you might talk to a financial planner about a retirement annuity.

Just Started Collecting Social Security Here’s How To Know Whether You’ll Owe Taxes On It

Roughly 1 in every 2 older adults will pay federal income taxes on a portion of their Social Security benefits for the 2020 tax year.

To be sure, this usually happens only if you have other substantial income in addition to your Social Security benefits, such as wages, self-employment, interest, dividends and other taxable income that must be reported on your tax return, according to Uncle Sam.

Taxable Social Security Benefits

Say your Social Security benefits are taxable based on your combined income. The amount of tax you pay depends on your level of income. Specifically, the difference between your combined income and the IRS base amount .

Youll never pay taxes on more than 85% of your Social Security benefits.

These thirteen states tax Social Security benefits under certain circumstances:

  • Colorado
  • Vermont
  • West Virginia

Iowa used to assess taxes on benefits, but it phased the taxes out completely in 2014, while New Mexico exempts some benefits for beneficiaries age 65 and over. These states tax Social Security benefits with varying methods, which can include using adjusted gross income or other figures.

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Tax Credit For Seniors

Even if you must file a tax return, there are ways you can reduce the amount of tax you have to pay on your taxable income. As long as you are at least 65 years old and your income from sources other than Social Security is not high, then the tax credit for the elderly or disabled can reduce your tax bill on a dollar-for-dollar basis.

Remember, with TurboTax, we’ll ask you simple questions about your life and help you fill out all the right tax forms. Whether you have a simple or complex tax situation, we’ve got you covered. Feel confident doing your own taxes.

Ways To Avoid Taxes On Benefits

Do You Have to Pay Taxes on Your Social Security and Other ...

The simplest way to keep your Social Security benefits free from income tax is to keep your total combined income so low it falls below the thresholds to pay tax. However, few choose to live in poverty just to minimize their taxes.

A more realistic goal is to limit how much tax you owe. Here’s a rundown of three solutions:

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Calculating Your Tax Rate

Your tax rate in retirement will depend on the total amount of your taxable income and your deductions. List each type of income and how much will be taxable to estimate your tax rate. Add that up, and then reduce that number by your expected deductions for the year.

For example, suppose that you’re married and filing a joint return with your spouse. You have $20,000 in Social Security income and $25,000 a year in pension income, and you expect to withdraw $15,000 from your IRA. You estimate that you’ll have $5,000 per year in long-term capital gains income from mutual fund distributions.

Your total income, not including capital gains and before Social Security benefits, is $40,000 . With capital gains, your total income is $45,000.

At $45,000, you’ll be taxed on up to 85% of your Social Security benefitsthat doesn’t mean 85% exactly, because it’s a formula, so it may be less. Based on all of this information, you’ll pay taxes on $15,350 of your Social Security benefits. That means your income will be $60,350 .

You can type all of this information into a tax calculator to better understand how much you’ll pay in taxes.

Your standard deduction for 2020the tax return you filed in 2021would be $24,800 as a married couple filing jointly. That would put your estimated taxable income at $35,500 , placing you in the 12% tax bracket for your top dollars. You’ll pay 10% on the first $19,750 of taxable income, and 12% on the income that falls between $19,750 and $80,250.

How Much Of Your Benefits Are Taxable

The amount of Social Security benefits that are taxable depend on the extent to which your income plus half of your benefits exceed certain base amounts. There are 2 possibilities:

  • 50% of benefits taxed. This is the amount of benefits that will be taxed if your income plus half of your benefits exceeds these base amounts:
    • $25,000 if single, head of household or qualifying widow
    • $25,000 if married, filing separate and lived apart from spouse all of the tax year
    • $32,000 if married, filing jointly
    • NOTE: These base amounts are the same ones described earlier.
  • 85% of benefits taxed. This is the amount of benefits that will be taxed if your income plus half your benefits exceeds these adjusted base amounts:
    • $34,000 if single, head of household or qualifying widow
    • $34,000 if married, filing separate, and lived apart from spouse for entire year
    • $44,000 if married, filing jointly
    • $0.00 if married, filing separate and lived with spouse at any time
    • .
  • NOTE: The adjusted base amount essentially allows the IRS to tax more of your Social Security benefits as income goes up.

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Is My Social Security Income Taxable The Quick Answer

According to the IRS, the quick way to see if you will pay taxes on your Social Social Security income is to take one half of your Social Security benefits and add that amount to all your other income, including tax-exempt interest. This number is known as your combined income .

If your combined income is above a certain limit , you will need to pay at least some tax.

The limit is $25,000 if you are a single filer, head of household or qualifying widow or widower with a dependent child. The limit for joint filers is $32,000. If you are married filing separately, you will likely have to pay taxes on your Social Security income.

Social Security In The Midwest

Do you have to pay taxes on your Social Security? (maybe not)

Out in the Midwest, only seven of 12 states are free of Social Security taxes. South Dakota doesn’t have an income tax. Meanwhile, Illinois, Indiana, Iowa, Michigan, Ohio, and Wisconsin have full state income tax protection for those receiving Social Security benefits.

On the other hand, Kansas, Minnesota, Missouri, Nebraska, and North Dakota tax Social Security in varying degrees. Minnesota and North Dakota are notable for following the federal rules on taxation.

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When Is Social Security Income Taxable

To determine when Social Security income is taxable, youll first need to calculate your total income. Generally, the formula for total income for this purpose is: your adjusted gross income, including any nontaxable interest, plus half of your Social Security benefits.

If youre married and filing jointly with your spouse, your combined incomes and social security benefits are used to figure your total income.

Then youll compare your total income with the base amounts for your filing status to find out how much of your Social Security income is taxable, if any.

Youll see that you fall into one of three categories. If your total income is:

  • Below the base amount, your Social Security benefits are not taxable.
  • Between the base and maximum amount, your Social Security income is taxable up to 50%.
  • Above the maximum amount, your Social Security benefits are taxable up to 85%.

How To Reduce Social Security Taxes

It’s hard to reduce those taxes but it’s not impossible.

If you can lower your adjusted gross income or AGI, you can reduce the amount of tax created on your Social Security benefit, Freitag explains.

There are two common ways to lower your AGI and another, which which is less common:

  • Take distributions from your Roth IRA, which are generally tax-free, versus your traditional IRA
  • Take certain distributions from your cash-value life insurance policy, if you have one
  • Taking money from a reverse mortgage, if you have one, is yet another way to create a cash flow that could help reduce how much income tax you might pay on your Social Security benefits.

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    How Much Of Your Social Security Is Taxable

    Its possible and perfectly legal to avoid paying taxes on your Social Security check. In fact, only about 40 percent of recipients pay any federal tax on their benefit.

    But heres the caveat: To receive tax-free Social Security, your annual combined, or provisional, income must be under certain thresholds:

    • $25,000, if youre filing as an individual
    • $32,000, if youre married filing jointly

    For married filing separately, the Social Security Administration simply says that youll probably pay taxes on your benefits.

    Your combined income consists of three parts:

    • Your adjusted gross income, not including Social Security income
    • Tax-exempt interest
    • 50 percent of your Social Security income

    Add those amounts up and if youre under the threshold for your filing status, you wont be paying federal taxes on your benefit.

    Even if youre above this threshold, however, you may not have to pay tax on your full benefit. You may pay taxes on only 50 percent of your benefit or on up to 85 percent of it, depending on your combined income.

    • For individual filers:
    • Combined income between $25,000 and $34,000, up to 50 percent of your benefit is taxable
    • Combined income above $34,000, up to 85 percent of your benefit is taxable
  • For married filing jointly:
  • Combined income between $32,000 and $44,000, up to 50 percent of your benefit is taxable
  • Combined income above $44,000, up to 85 percent of your benefit is taxable
  • The 1040 Tax Form Once Retired

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    To see how taxes work once you are retired, start with the excerpt from the first page of the new 1040 tax form below.

    When you file a 1040 tax form, if you receive a W-2 wage, the majority of your income shows up on line 1, under Wages, salaries, tips, etc. If you are self-employed, you may also file a Schedule C. Self-employment and other business income, such as from partnerships or S Corp distributions, will flow through to Schedule 1, then into line 7a above.

    Once retired, the majority of your income will show up where you see the orange arrows in the screenshot, in lines:

    • 2a/2b Tax-exempt and taxable interest
    • 3a/3b Qualified and ordinary dividends
    • 4a/4b IRA distributions
    • 4c/4d Pension and annuities
    • 5a/5b Social Security

    You may also have capital gains and losses from the sale of direct owned investments or real estate. These are reported on line 6.

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    Are Spousal Survivor Disability And Ssi Benefits Taxable

    These programs all follow the same general rules as the Social Security program for retirees, with one exception: Supplemental Security Income, or SSI for short, is not a Social Security program. It’s a separate program for people who are needy and disabled people, and payments from it are not taxable.

    What Is ‘combined Income’ And How Is It Calculated

    Its your adjusted gross income or AGI plus your nontaxable interest plus one-half of your Social Security benefits.

    Now the thing about these taxes is this: No one should really be surprised by them. These taxes on Social Security have been with us since the Greenspan Commission created them in 1983, according to David Freitag, a financial planning consultant with MassMutual.

    But you might be surprised by the following details:

    The thresholds are not indexed for inflation. So as income in retirement has increased, more and more people are paying more and more income tax on their Social Security benefits, Freitag explains.

    Others see the same trend. Because the thresholds that determine whether or not Social Security benefits are taxable were never adjusted for inflation, it is pretty hard today to avoid paying taxes on Social Security benefits, says Elaine Floyd, director of retirement and life planning at Horsesmouth.

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    History Of Social Security Tax Rates

    The Social Security tax began in 1937. At that time, the employee rate was 1%. It has steadily risen over the years, reaching 3% in 1960 and 5% in 1978. In 1990, the employee portion increased from 6.06 to 6.2% but has held steady ever sincewith the exception of 2011 and 2012.

    The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 reduced the contribution percentage to 4.2% for employees for those years employers were still required to pay the full amount of their contributions.

    The tax cap has existed since the inception of the program in 1937 and remained at $3,000 until the Social Security Amendments Act of 1950. It was then raised to $3,600 with expanded benefits and coverage. Additional increases in the tax cap in 1955, 1959, and 1965 were designed to address the difference in benefits between low-wage and high-wage earners.

    The Social Security tax policy in the 1970s saw a number of proposed amendments and re-evaluations. The Nixon Administration was paramount in arguing that tax cap increases needed to correlate with changes in the national average wage index in order to address benefit levels for individuals in different tax brackets. The 1972 Social Security Amendments Act had to be revamped due to problems with the benefits formula that caused financing concerns. A 1977 amendment resolved the financial shortfall and established a tax cap increase structure that correlated with average wage increases.

    Will Income Taxes Go Up

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    I dont disagree with Brians goal of tax minimization. Furthermore, I agree with his facts about debt and taxes. However, I wont bet my whole retirement strategy on the fear of a tax increase.


    I believe that tax increases on the middle class are unlikely in the future.

  • Firstly, modern monetary theory states that national debt does not matter. While that sounds shocking, the bond market shows no worries about our current borrowing pattern. And economists no longer believe inflation depends upon the money supply. We can literally print money to pay for the debt without causing inflation.
  • Congress must pass tax increases. Who wants to raise taxes on retirees? Republicans oppose raising taxes on anyone. Democrats oppose taxing the middle and lower classes. Therefore, nobody wants to raise income taxes on retirees.
  • If we do need to raise taxes to pay off our debt, there are other ways to raise taxes.
  • The US may institute a Value Added Tax like Europe.
  • Or the US may enact a wealth tax.
  • Finally, we might do something really crazy like taxing Roth withdrawals or abolishing Roth accounts.
  • Do I really think Congress will tax Roth withdrawals in the future? Of course not. But you would be kidding yourself if you thought Congress does not have the power to tax these withdrawals.

    In short, we dont know what will happen in the future. While Brian is convinced the US will raise income taxes on retirees in the future, I am less certain of this fact.

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    How To Plan For Social Security Taxes

    A balanced approach to distribution is the best way to plan for Social Security taxes, says Freitag. Keep in mind that too much emphasis on one type of distribution or another is not the way to go.

    It is better to have a mix of income streams in retirement, he says. As an example, if all your income is taxable, then adding Social Security just makes it worse across the board.

    Do I Need To File Even If Im Not Required To By Filing Status Age And Income Level

    In some cases, yesyou will still need to le a tax return if any of the following apply:

    • You owe any taxes, such as alternative minimum tax, taxes on a retirement plan distribution, household employment taxes, and Social Security and Medicare taxes that were not withheld from income.
    • You received a distribution from a health savings account, Archer MSA, or Medicare Advantage MSA.
    • You had at least $400 in self-employment income.
    • You earned $108.28 or more from a church or qualified church-controlled organization that is exempt from employer Social Security and Medicare taxes.
    • You received an advance payment of the Premium Tax Credit for health insurance bought from a health insurance marketplace. You should receive Form 1095-A with the amount of the advance payments.
    • Advance payments of the health coverage tax credit were made for you, your spouse or a dependent. You should receive Form 1099-H with the amount of the advance payments. Note: For tax year 2020, any excess amount of advance premium tax credit payments received doesnt have to be repaid, according to the American Rescue Plan .
    • You were required to file Form 965 for a triggering event or Form 965-A for an elected installment payment.

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    Gains Upon The Sale Of Your Home

    You most likely won’t pay taxes on gains from the sale of your home if you’ve lived there for at least two years, unless you have gains in excess of $250,000 if you’re single, or $500,000 if you’re married. The rules get more complex if you rented your home out for a while, so you might want to work with a tax professional to determine whether and how you should report any gains.

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