Will You Pay Tax on Your Social Security Benefits?

Some individuals who start drawing social security benefits end up with a nasty surprise come tax time – they owe tax on a portion of these benefits! After all, such benefits were historically exempt from any federal income tax. Times have changed, however, and you need to be aware of how you might be affected. If you aren’t relying on social security benefits as your primary income source, chances are that you will owe tax on some part of those benefits.

Let’s go through a simple overview to help you determine how much of your social security might be taxable.

The first thing you need to do is determine your “combined income” amount for the year, or the total of all your income other than social security (including tax-exempt interest) plus 50% of your social security benefits. If this number is:

  • under $25,000, and you file as Single, Head of Household, Qualifying Widower, or Married Filing Separately, you will NOT owe tax on any of the benefits.
  • under $32,000, and you file as Married Filing Jointly, you will NOT owe tax on any of the benefits.
  • between $25,000 and $34,000, and you file as Single, Head of Household, Qualifying Widower, or Married Filing Separately, you may have to pay tax on up to 50% of your benefits.
  • between $32,000 and $44,000, and you file as Married Filing Jointly, you may have to pay tax on up to 50% of your benefits.
  • over $34,000, and you file as Single, Head of Household, Qualifying Widower, or Married Filing Separately, up to 85% of your benefits may be taxable.
  • over $44,000, and you file as Married Filing Jointly, up to 85% of your benefits may be taxable.

One important thing to keep in mind is that these aren’t “cliff” thresholds – in other words, moving one dollar above one of these threshold amounts will NOT automatically cause you to have that full percentage amount included in your taxable income. Instead, the IRS has you complete a worksheet to calculate the taxable amount, and it takes an incremental approach to this determination.

As an example, let’s say that you are a single filer with social security benefits of $15,000 and other income of $18,500. In this case, your combined income is $26,000 ($18,500 plus 50% of $15,000, or $7,500), which is only $1,000 over the taxable threshold for single filers. However, in this case, you do NOT automatically have 50% of your benefits included in taxable income. In fact, if you complete the IRS worksheet you’ll find that your taxable social security would only be $500 in this case, which is well below 50%.

Generally speaking, the amount of taxable social security will be a percentage of the amount that exceeds the threshold. In the above case, the combined income exceeded the threshold amount by $1,000, so $500 is taxable (50% of the amount that exceeded the threshold). Likewise, if the combined income in the above case was instead $35,000, the taxable social security would be $850 – the combined income was $1,000 over the threshold, so the taxable social security would be 85% of that amount, or $850.

Here are some important things to note:

  • Put simply: if you rely solely on social security income, your benefits are probably not taxable. On the other hand, if you have a lot of income in addition to your social security benefits, the taxable benefits will probably be in the highest threshold (85% of the amount received).
  • You can choose to have Federal taxes withheld automatically from your social security income. Use Form W-4V to let the Social Security Administration know how much to withhold on your benefits (send or take this to a Social Security Administration office, not the IRS!).
  • If you receive a lump-sum payment in the current year for back social security benefits for prior years, you CANNOT amend prior year returns to reflect the benefits related to those years. You must include the total received in the current year in your current year’s income. However, the IRS does give you options in figuring out the taxable amount to include in the current year’s income.
  • As far as state taxes go, there are 13 states that tax some portion of social security income – Colorado, Connecticut, Kansas, Minnesota, Missouri, Montana, Nebraska, New Mexico, North Dakota, Rhode Island, Utah, Vermont, and West Virginia.

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