Thursday, May 19, 2022

When Are Social Security Benefits Taxable

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Can You Live On Social Security Alone

Is Social Security Taxable?

Surviving on Social Security alone in retirement would be difficult for most. The average person received just $17,040 per year in 2019. The maximum Social Security benefit for 2020 is expected to be $2861 at full retirement age. . For sure this is a good amount of money, dont get me wrong, but not exactly living rich.

How much of your Social Security benefits will be taxed will ultimately depend on your other income sources. This will be a combination of all other earnings in a given year, plus some portion of your Social Security benefits. These other sources will include everything from distributions from your 401 or IRA, wages from work, royalties or rental income.

Most people know to have a strategy to get the largest Social Security Benefits throughout their retirements. Having a plan to pay the least amount of taxes on your Social Security benefits it much less common.

Keep reading to learn more about Social Security taxation.

Living off of Social Security alone will be a stretch for most retirees.


States That Don’t Tax Social Security Benefits

    It’s a good goal to retire with your mortgage paid off so you don’t have mortgage payments hanging over your head while you’re on a more fixed income in retirement. It can also be very helpful to not have your Social Security benefits taxed.

    Fully 37 states — plus the District of Columbia — don’t tax Social Security benefits. See whether your state does — and if so, if it taxes benefit holders in a meaningful way.

    What Percentage Of Social Security Is Taxable

    If you file as an individual, your Social Security is not taxable only if your total income for the year is below $25,000. Half of it is taxable if your income is in the $25,000$34,000 range. If your income is higher than that, then up to 85% of your benefits may be taxable.

    If you and your spouse file jointly, youll owe taxes on half of your benefits if your joint income is in the $32,000$44,000 range. If your income is above that, then up to 85% is taxable income.

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    How Social Security Benefits Are Taxed

    Social Security beneficiaries must pay federal income tax on a portion of their benefits if their income exceeds certain thresholds the portion of benefits that is taxable rises with income. Income for this purpose equals a taxpayers adjusted gross income plus tax-exempt interest, certain other tax-exempt income, and half of Social Security benefits this is referred to as modified AGI. A three-part formula applies:

    • For individuals with modified AGI below $25,000 and couples with modified AGI below $32,000, no Social Security benefits are taxable.
    • For individuals with modified AGI between $25,000 and $34,000 and couples with modified AGI between $32,000 and $44,000, up to 50 percent of benefits are taxable.
    • For individuals with modified AGI over $34,000 and couples with modified AGI over $44,000, up to 85 percent of benefits are taxable.

    For a detailed explanation of the tax calculation, see Appendix Table 1.

    How Do I Determine If My Social Security Is Taxable

    Taxable Social Security Calculator

    Add up your gross income for the year, including Social Security. If you have little or no income in addition to your Social Security, then you wont owe taxes on it. If youre an individual filer and had at least $25,000 in gross income including Social Security for the year, then up to 50% of your Social Security benefits may be taxable. For a couple filing jointly, the minimum is $32,000. If your gross income is $34,000 or more , then up to 85% may be taxable.

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    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 To Find Out If You Have To Pay Tax

    Each January, you should get a social security benefit statement showing the amount of benefits you received in the previous year.

    You can use then this benefit statement when you complete your federal income tax return to find out if your welfare payments are subject to tax.

    If you haven’t received it, or if you’ve misplaced it, you can order a new one by using your online social security account.

    To get a replacement form, simply select the “Replacement Documents” tab and follow the instructions.

    If you do have to pay taxes on your social security benefits, you can make quarterly estimated tax payments to the IRS.

    Alternatively, you may choose to have federal taxes withheld from your benefits when you first apply.

    You can have either 7%, 10%, 12% or 22% of your monthly benefit withheld for taxes.

    Taxing Social Security Benefits Is Sound Policy

    Good Question: Why Are Social Security Benefits Taxed?

    Social Security beneficiaries with higher incomes pay income tax on part of their benefits. Those with incomes below $25,000 pay no tax on benefits, while those with the highest incomes pay tax on as much as 85 percent of their benefits. This arrangement is sound for several reasons:

    • The substantial proceeds from taxing Social Security benefits are credited to the Social Security and Medicare trust funds, strengthening the programs financing.
    • The taxation of benefits is broadly progressive, since people with low incomes pay nothing and the tax rate on benefits increases with income.
    • As an earned benefit, Social Security should be subject to tax, like other earned benefits, such as employer pensions.
    • Social Securitys tax treatment is more favorable than that of private defined-benefit pensions, primarily because of the protections for low-income beneficiaries.

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    Why Social Security Is Taxable

    Once upon a time, Social Security benefits were completely tax-free. Then, in 1983, President Reagan signed an amendment making up to 50% of Social Security benefits taxable. In 1993, President Clinton signed a bill that made up to 85% of “higher-income” Social Security recipients’ benefits subject to taxation. Unfortunately, that bill failed to provide a method for raising the tax’s income thresholds in response to inflation, so what was once a “higher-income” threshold now includes a much wider range of Social Security beneficiaries.

    How Will Working Affect Social Security Benefits

    In a recent survey, 68% of current workers stated they plan to work for pay after retiring.1

    And that possibility raises an interesting question: how will working affect Social Security benefits?

    The answer to that question requires an understanding of three key concepts: full retirement age, the earnings test, and taxable benefits.

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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 that theyre not subject to taxation when the funds are withdrawn. Thus, the distributions from your Roth IRA are tax freeprovided that theyre taken after you turn age 59½ and have had the account for five or more years. The Roth payout wont affect your taxable income calculation and wont increase the tax that you owe on your Social Security benefits. Distributions taken from a traditional IRA or traditional 401 plan, on the other hand, are taxable.

    The Roth 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 that 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.

    How Much Is Taxable

    56% of Social Security Households Pay Tax on Their ...

    Generally, up to 50% of benefits will be taxable. However, up to 85% of benefits can be taxable if either of the following situations applies.

    • The total of one-half of the benefits and all other income is more than $34,000 .
    • You are filing Married Filing Separately and lived with your spouse at any time during the year.

    Who is taxed. Benefits are included in the taxable income for the person who has the legal right to receive the benefits.

    Example: Lisa receives Social Security benefits as a surviving spouse who is caring for two dependent children, Christopher, age 9, and Michelle, age 7. As dependents of their deceased father, Christopher and Michelle also receive Social Security benefits. The benefits for Christopher and Michelle are made payable to Lisa. When calculating the taxable portion of the benefits received, Lisa uses only the amount paid for her benefit.

    The amounts paid for Christopher and Michelle must be added to each childâs other income to see whether any of those benefits are taxable to either of the children.

    Withholding. You can choose to have federal income tax withheld from Social Security or Railroad Retirement benefits by completing Form W-4V, Voluntary Withholding Request.

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    Are Social Security Benefits Taxable

    • 10:44 ET, Apr 14 2021

    SOCIAL security benefits are given to the elderly to support them in retirement, and disabled Americans to help with extra living costs.

    To qualify for the payments, individuals must have worked and paid into the social security scheme for certain amount of time.

    The amount you receive is based on your earnings history, the year you were born, and when you start to claim social security.

    Nearly nine out of 10 individuals aged 65 and older receive social security benefits, and they make up around 33% of the income of the elderly.

    With tax return season well under way, we explain whether you need to pay tax on the benefits.

    Last month, the Internal Revenue Service extended the tax return deadline from April 15 to May 17.

    Calculating Your Social Security Income Tax

    If your Social Security income is taxable, the amount you pay in tax will depend on your total combined retirement income. However, you will never pay taxes on more than 85% of your Social Security income. If you file as an individual with a total income thats less than $25,000, you wont have to pay taxes on your Social Security benefits in 2021, according to the Social Security Administration.

    For the 2021 tax year, single filers with a combined income of $25,000 to $34,000 must pay income taxes on up to 50% of their Social Security benefits. If your combined income was more than $34,000, you will pay taxes on up to 85% of your Social Security benefits.

    For married couples filing jointly, you will pay taxes on up to 50% of your Social Security income if you have a combined income of $32,000 to $44,000. If you have a combined income of more than $44,000, you can expect to pay taxes on up to 85% of your Social Security benefits.

    If 50% of your benefits are subject to tax, the exact amount you include in your taxable income will be the lesser of either a) half of your annual Social Security benefits or b) half of the difference between your combined income and the IRS base amount.

    The example above is for someone who is paying taxes on 50% of his or her Social Security benefits. Things get more complicated if youre paying taxes on 85% of your benefits. However, the IRS helps taxpayers by offering software and a worksheet to calculate Social Security tax liability.

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    How To File Social Security Income On Your Federal Taxes

    Once you calculate the amount of your taxable Social Security income, you will need to enter that amount on your income tax form. Luckily, this part is easy. First, find the total amount of your benefits. This will be in box 3 of your Form SSA-1099. Then, on Form 1040, you will write the total amount of your Social Security benefits on line 5a and the taxable amount on line 5b.

    Note that if you are filing or amending a tax return for the 2017 tax year or earlier, you will need to file with either Form 1040-A or 1040. The 2017 1040-EZ did not allow you to report Social Security income.

    How To Plan For Social Security Taxes

    Are your social security benefits taxable?

    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.

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    Who’s Eligible For Social Security Disability Insurance

    To qualify for Social Security Disability Insurance, you must meet certain conditions.

    First, you must meet a recent work test. This means earning at least a minimum amount per calendar quarter and working long enough. For each quarter you work and earn at least $1,470 , you receive one Social Security credit.

    Meeting the recent work test requirement depends on your age. It also requires different amounts of Social Security credits.

    • Under age 24: You meet the recent work test if you earned 6 credits in the 3-year period when your disability began.
    • Age 24 to 31: In general, you may qualify if you have credits for working half the time between age 21 and becoming disabled.
    • Age 31 or older: You’ll need to have earned at least 20 credits in the 10-year period immediately before becoming disabled.

    Second, review the Social Security Administration’s table to determine if you meet the duration work test based on your age and when your disability began.

    Third, you must be unable to work because of a medical condition that has lasted a year, is expected to last at least one year, or is expected to result in death. This means not having a partial disability and meeting the Social Security Administration’s definition of disabled.

    Fourth, you must be younger than your full retirement age as defined by Social Security.

    Paying Taxes On Social Security

    You should get a Social Security Benefit Statement each January detailing the benefits that 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 website.

    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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    How To Minimize Your Tax Bill

    For most retirees, it’s distributions from traditional IRAs and 401 accounts that push their combined income over the threshold and cause their Social Security to be taxed. Unfortunately, you don’t have complete control over how much money you take out of these accounts: The IRS requires you to take mandatory minimum distributions once you hit age 70-1/2. Your only option with traditional retirement accounts is to limit yourself to the required minimum distribution and hope that that income won’t be enough to make your benefits taxable.

    If you’re fortunate enough to have a Roth, you’re in a much better position to control your Social Security taxes. Roth distributions are not taxable income, so they don’t count toward the income threshold that determines whether your benefits are taxable. And there’s no required minimum distribution from Roth accounts, so you can take distributions when it makes the most sense for you and leave the rest to keep growing for as long as possible.

    What Are Your Social Security Benefits

    Working in retirement

    Each year, sometime in late January or February, you should get a statement from the Social Security Administration called a “Form SSA-1099”. The amount reported in Box 5 of that form is the amount you will use to determine if any of the benefits are taxable.

    If you get more than one form, you should add together the amounts in Box 5 of each form.

    If you receive a “Form RRB-1099” this means your Social Security-equivalent is being paid by the Railroad Retirement Board. You will also use Box 5 of that form in calculating if benefits are taxable.

    If you receive Supplemental Security Income payments during the year, you should not include those payments in your calculations because they are not taxable for federal income tax purposes.

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    How Much Of Your Social Security Income Is Taxable

    Social Security payments have been subject to taxation above certain income limits since 1983. No inflation adjustments have been made to those limits since then, so most people who receive Social Security benefits and have other sources of income pay some taxes on the benefits.

    No taxpayer, regardless of income, has all of their Social Security benefits taxed. The top level is 85% of the total benefit. Heres how the Internal Revenue Service calculates how much is taxable:

    • The calculation begins with your adjusted gross income from Social Security and all other sources. That may include wages, self-employed earnings, interest, dividends, required minimum distributions from qualified retirement accounts, and any other taxable income.
    • Tax-exempt interest is then added.
    • If that total exceeds the minimum taxable levels, then at least half of your Social Security benefits will be considered taxable income. You then have to take the standard deduction or itemize deductions to arrive at your net income. The amount that you owe depends on precisely where that number lands in the federal income tax tables.

    Combined Income = your adjusted gross income + nontaxable interest + half of your Social Security benefits

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