How To Report Your Social Security Income
Each January, you will receive a Form Social Security 1099, SSA-1099, that shows the total benefits you received for the previous year and the total amount you are required to report to the IRS on your federal tax return.
If you misplaced your form, you can download a copy by creating a free online account with the Social Security Administration.
You will report the amount in Box 5 of Form SSA-1099 and the total amount on line 6a of your Form 1040, U.S. Individual Income Tax Return or Form 1040-SR, U.S. Tax Return for Seniors. The amount considered taxable income depends on what other income you earned during the year, which you should note on line 6b of Form 1040 or Form 1040-SR.
Remember: The taxable amount of your benefits is based on your filing status and combined income. If you need to calculate the taxable amount of Social Security benefits, you can use this worksheet.
The Tax Is Also Subject To An Income Cap
The Old-Age, Survivors and Disability Insurance program taxmore commonly called the Social Security taxis calculated by taking a set percentage of your income from each paycheck. Social Security tax rates are determined by law each year and apply to both employees and employers.
For 2021, the Social Security tax rate for both employees and employers is 6.2% of employee compensation, for a total of 12.4%. Those who are self-employed are liable for the full 12.4%.
The combined taxes withheld for Social Security and Medicare are referred to as the Federal Insurance Contributions Act . On your pay statement, Social Security taxes are referred to as OASDI, and Medicare is shown as Fed Med/EE. Both Social Security and Medicare are federal programs that provide benefits for retirees, people with disabilities, and children of deceased workers.
How To Minimize Taxes On Your Social Security
If your Social Security benefit is relatively fixed, albeit with small annual increases, you really have only two avenues left to get into that tax-free zone: reducing tax-exempt interest or adjusted gross income. And since most people dont have tax-exempt interest, youre left with one option.
Therefore, the secret is to reduce your adjusted gross income in order to prevent provisional income from triggering a tax on Social Security, says Kelly Crane, president and chief investment officer at Napa Valley Wealth Management in St. Helena, California.
Here are a few ways to reduce your adjusted gross income to get into the tax-free zone:
If You Work More Than One Job
Keep the wage base in mind if you work for more than one employer. If you’ve earned $69,000 from one job and $69,000 from the other, you’ve crossed over the wage base threshold. Neither employer should withhold any further Social Security tax from your payor pay half the 12.4% on your behalfuntil year’s end.
It doesn’t matter that individually, neither job has reached the wage base threshold. The wage base threshold applies to all your earned income. But separate employers might not be aware you’ve collectively reached this limit, so you’ll have to notify both employers they should stop withholding for the time being. However, you can always receive reimbursement of any overpayment when you file your taxes.
These are annual figures, so the Social Security tax starts right back up again on Jan. 1 until you hit the next year’s Social Security wage base.
Why Do We Have To Pay Taxes
SS has been running on fumes for a while now. And back in the 1980s, Congress passed legislation to try to shore it up. One of the more controversial additions to the Amendments of a 1983 bill was taxing Social Security benefits, which the government officially implemented in 1984. It was intended to only impact upper-income senior households, and its purpose was to help raise additional revenue and avoid reducing retiree benefits.
It has been pretty unpopular ever since.
If most of our income came from Social Security, we probably wouldnt owe any tax. Thats good news and bad, of course. It would be nice not to have to pay taxes but perhaps not so good that wed have little more than Social Security to live on. I think its better to have a little more than just Social Security, even if I have to pay taxes on it. Of course, the more income other than SS we have, the more taxes we will have to pay.
We have to pay taxes because, 1) Most of our SS benefits are taxable due to income from savings that pushes our total income over certain limits, and 2) The money I withdraw from savings is taxable whether we owe taxes on our SS benefits or not.
Almost any form of income in addition to SS benefits except Roth IRA distributions would push us over the limits, but these are the most common ones:
- Large IRA account balances
- Large taxable account balances
- Large investments in municipal bonds
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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%.
Minimize Withdrawals From Your Retirement Plans
Money that you pull from your traditional IRA or traditional 401 will count as income in the year that you withdraw it. So if you can minimize those withdrawals or even not withdraw that money at all, it will help you get close to the tax-free threshold. Of course, this may not apply if youre forced to take a required minimum distribution that pushes you over the edge.
If youre not forced to take an RMD in a given year, consider taking money from your Roth IRA or Roth 401 instead and avoid generating taxable income.
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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.
When You Claim Matters
If you claim your Social Security benefits before your FRA, or full retirement age , you will end up with a permanently reduced monthly benefit because of the early age. If you claim at the earliest possible age of 62, your monthly checks could be up to 30% less than at your FRA.1
There will also be an earnings test until you reach that FRA: If you have earned income in excess of $18,240 in 2020, your benefits will be reduced by $1 for every $2 of earned income over the limit.
In the year of reaching your FRA, the earnings test limit is $48,600 in 2020, and your benefits will be reduced by $1 for every $3 of earned income over the limit.
These benefits are not truly “lost,” however. If your benefits have been reduced due to earning, your monthly Social Security check will be increased after your FRA to account for benefits withheld earlier due to excess earnings. Note that “earned” income includes wages, net earnings from self-employment, bonuses, vacation pay, and commissions earnedbecause they’re all based upon employment. Earned income does not include investment income, pension payments, government retirement income, military pension payments, or similar types of “unearned” income.
Once you reach your FRA, there is no earnings test and no benefit reductions based on earned income.
Scenarios: Claiming Social Security at 62 while working
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How Much Can I Earn If I Work After My Full Retirement Age
If you continue to work after reaching full retirement age, you may work and earn as much as you’d like. You will not be subject to the retirement earnings test, and your Social Security benefits will not be affected.
If you work prior to FRA, you may forfeit part of your benefits if you earn above annual thresholds. However, your benefit amount will be recalculated at full retirement age to account for most of those forfeited funds.
Will Your Social Security Benefits Be Taxed
Most dont think too much about income taxes in retirement. They just assume that theyll pay less since its possible that their income will be less. For many, thats a reasonable assumption . Others believe that their Social Security retirement benefits arent taxable, further reducing their overall tax bill.
Well, as it turns outs, some of us wont have to pay taxes on Social Security benefits, but many of us will. If you start receiving benefits and have a pension or annuity, withdraw from savings, or work part-time, you probably will. And as we will see, how much tax you pay depends on a variety of factors.
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Why You May Not Want Social Security’s Max Benefit
It’s highly unlikely that you’ll qualify for Social Security’s maximum benefit. So the question is really: Should you hold out for the biggest possible benefit you could receive?
Delaying Social Security past age 62 to increase your benefit can be a smart move, particularly if you enjoy working or are falling short on retirement savings. But a lot of people can’t afford to hold out for the maximum benefit, given that seniors are often forced out of the workforce sooner than they expected. There’s also quality of life to consider. Taking a lower benefit sooner may help you enjoy your retirement years more.
You should also take into consideration your life expectancy. You’d need to live to be 78 in order to get more out of Social Security by claiming at 70 vs. age 62. Obviously, none of us can predict when we’ll die, but the certainty of collecting money sooner may be worth the unknowns associated with waiting longer.
Regardless of whether you want your benefits sooner or later, try to invest at least 15% of your pre-tax income in a retirement account. Your senior years will be much easier if Social Security isn’t your only income source.
States That Don’t Tax Social Security Benefits
Many people are surprised to learn that they can end up having to pay federal income tax on their Social Security benefits. To add insult to injury, some states also require residents above a certain income threshold to pay state income tax on what they receive from Social Security. Yet the majority of states are kind enough not to tax Social Security, so it’s worth considering the issue in choosing where you want to live after you quit your job and start drawing your benefits.
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The Social Security Tax Wage Base
All wages and self-employment income up to the Social Security wage base are subject to the 12.4% Social Security tax. The wage base is adjusted periodically to keep pace with inflation. It was increased from $132,900 to $137,700 in 2020 and to $142,800 for 2021. Here’s how it broke down year by year from 2012 to 2021:
|Social Security Wage Base by Year|
Federal Exemptions For Social Security Tax
If your total income was low enough, you may not need to pay federal taxes on any of your Social Security income. To find out if any of your benefits are taxable, compare your base income to the allowance for your tax filing status. Your base income is your income from all sources — including tax-exempt interest — other than Social Security, plus half of your Social Security benefits. For example, say your income other than Social Security was $10,000 and your Social Security benefits were $8,000. Your base income would be $14,000 . Single filers, head of household filers and widowers may have up to $25,000 in base income and pay no taxes on Social Security. The limit is $32,000 for married couples filing jointly.
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What If You Are A Canadian Resident Who Receives Us Social Security Benefits
We recently published an article about US residents who receive CPP/OAS Canadian pension benefits. What about the opposite?
Lets take the case of our reverse snowbird Emily, a Canadian citizen who has been living and working in the US for the last 30 years and has fully qualified for US social security benefits. Instead of retiring in sunny Florida like a lot of Canadians choose to do, Emily wants to retire back in the frozen tundra otherwise known as Edmonton.
Is Emily crazy to retire in Canada?
Yes, if the weather is the only factor you consider.
But from a tax perspective, the US-Canada tax treaty is actually very favorable to Emily when it comes to the taxation of her US social security benefits when she moves back to Canada.
How so? Well, to begin with, Emily will not have to pay any US tax on the US social security benefits she receives in Canada. In order words, Emily does not need to pay a US withholding tax or even US income tax on the social security income received.
But wait. What if Emily is a US citizen living in Canada? Luckily for Emily, even a US citizen is treated the same way as other residents of Canada when it comes to the taxation of US social security benefits.
Namely, the US social security benefits will be subject to tax only in Canada.
What this means is that Emily will include in her Canadian taxable income only 85% of the US social security benefits she receives. For those of you doing the math, the other 15% will be exempt from tax in Canada.
Paying Taxes On Social Security
You should get a Social Security Benefit Statement each January, detailing the benefits you received during the previous tax year. You can use it to determine whether you owe federal income tax on your benefits. The information is available online if you enroll on the Social Security site.
If you owe taxes on your Social Security benefits, you can make quarterly estimated tax payments to the IRS or have federal taxes withheld from your payouts before you receive them.
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Keep Some Retirement Income In Roth Accounts
Contributions to a Roth IRA or Roth 401 are made with after-tax dollars. This means they’re not subject to taxation when the funds are withdrawn. So the distributions from your Roth IRA are tax-free, provided their taken after you turn 59 1/2 and have had the account for five or more years. Distributions taken from a traditional IRA or 401 plan, on the other hand, are taxable.
That means the Roth payout won’t affect your taxable income calculation. That also means it won’t increase the tax you owe on your Social Security benefits.
This advantage makes it wise to consider a mix of regular and Roth retirement accounts well before retirement age. The blend will give you greater flexibility to manage the withdrawals from each account and minimize the taxes you owe on your Social Security benefits.
A similar effect can be achieved by managing your withdrawals from conventional savings, money market accounts, or tax-sheltered accounts.
The Answer Is More Complicated Than You Might Think Here’s How To Figure It Out
You probably know that Social Security tax is deducted from each of your paychecks and that some of that money comes back to you in the form of benefits in your senior years. But not everyone is aware that the government could gouge you again in retirement by taxing your Social Security benefits if your income in retirement reaches a certain level.
The Social Security benefit tax formula is a little complicated, but it’s something everyone should understand so they can take steps to avoid benefit taxation or at least avoid unpleasant surprises come tax season. Here’s what you need to know to determine if your benefits are at risk of being taxed.
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