In 2022, millions of retirees are going to get a boost in their Social Security benefits. At 5.9%, this is the largest cost-of-living adjustment that has been made in nearly 40 years. The coronavirus pandemic led to an economic meltdown throughout the world, which has resulted in staggering inflation in the U.S.
If you receive Social Security income or are going to be receiving it soon, you might be wondering what implication this has for your taxes.
For example, is Social Security income taxable? If so, how is Social Security taxed? What percentage of SS is taxable?
Let's take a look at the answers to these questions and more.
Is Social Security Income Taxable?
For most Americans, Social Security is taxable. What this means is that most individuals in the U.S. that receive Social Security benefits do pay income tax on a portion of the money they receive. This is because the amount of money they receive in income from Social Security and other sources makes it so their income is above the limit which requires that taxes are paid.
For individuals that have a total gross income of $25,000 or more (including the amount received from Social Security), up to half of their Social Security income is considered taxable. For married couples that are filing their taxes jointly, their combined gross income must be $34,000 or more for this income to be taxable.
For individuals who have a combined gross income of $34,000 or more, up to 85% of benefits from Social Security are taxable. For married couples that are filing jointly, this threshold is $44,000.
However, if an individual doesn't have much in the way of income other than Social Security, they likely won't have to pay any taxes on the benefits that they receive. In some cases, the person might not even have to file a tax return at all.
Determining How Much of Your Social Security Income Is Taxable
Since 1983, Social Security benefits have been subject to taxation for people above certain income limits. The limits have not been changed due to inflation adjustments since then. What this means is that most of the people who get Social Security benefits will have additional income sources and therefore have to pay taxes on the SS they receive.
For no individual is 100% of Social Security income taxed, however. The most that anyone pays is 85% of the benefits.
The IRS has a process for how they determine what percentage of your Social Security benefits are taxable. It is as follows:
- They take your adjusted gross income from all sources including Social Security
- They then add tax-exempt interest which is a part of the calculation but isn't taxed
- If an individual has a total that is above the minimum taxable levels, that means that at least half of your SS benefits will be considered as taxable income
- An individual can itemize deductions or take the standard deduction
- Federal income tax tables exist to determine the precise amount that you owe based on your income
It's worth understanding that your combined income is the sum of your nontaxable interest, half of your Social Security benefits, and your adjusted gross income.
Individual Tax Rates
If you file a federal tax return as an individual, your benefits might be subject to tax if your combined gross income is more than $25,000.
If your combined gross income is between $25,000 and $34,000, up to half of your SS benefits might be subject to income tax. If your income is more than $34,000, it means that up to 85% of your Social Security income might be taxed.
Married Tax Rates
If you are married and file taxes jointly with your spouse, you will have to pay taxes on a portion of your Social Security income if your combined income is over certain limits.
For those that make between $32,000 and $44,000, up to half of the SS income might be taxable. For those that make more than $44,000, their benefits might be taxable up to 85%.
Social Security and Taxes: The Interactive Tax Assistant
The IRS offers an interactive tool to help people understand how much they will owe in Social Security taxes. This is known as the Interactive Tax Assistant (ITA). Basically, it will go through a number of potential complications to help you determine what percentage of your SS income is taxable.
How Do I Pay Taxes on Social Security?
When you receive Social Security benefits, you should receive a statement each January that outlines your received benefits for the prior tax year. This form is known as Form SSA-1099.
You can use this document to help you learn how much federal income tax you will have to pay on the income you received. If you enroll on the Social Security website, you can also access this information online.
You can have federal taxes withheld from your Social Security benefits before you receive them if you choose to. Otherwise, you can also make quarterly estimated tax payments to the IRS.
How Can I Legally Avoid Paying Taxes on Social Security Benefits?
There are a number of ways that you can reduce how much you pay in taxes on your Social Security benefits. The most obvious choice is to keep your income below a certain limit. However, this is likely not realistic for many Americans who hope to have a more flush retirement than simply living on SS benefits.
Let's take a look at some of the other options you have for avoiding paying taxes on your benefits.
Withdraw Your Taxable Income Before You Retire
You might consider maximizing your taxable income in the years before you are going to start receiving benefits. An example of this would be to tax distributions from your retirement accounts as you near retirement. If you wait until after you're 59.5 but before you retire, you can avoid being negatively impacted by these withdrawals and pay taxes while you still have a heftier income source.
You have to plan your withdrawals carefully because they are taxable. If you can plan it out correctly, you can pay less in tax by increasing withdrawals before you receive SS than after you start receiving benefits.
You will also need to plan for the fact that you're required to take RMDs from this type of retirement account at the age of 72.
Lastly, this strategy can also help to boost your income when you're getting close to retirement or recently retired. This means that you might be able to hold off on when you apply for your benefits. This can boost how big your payments are when you do receive them.
Put Some of Your Retirement Income in Roth Accounts
When you contribute money to a Roth 401(k) or a Roth IRA, the money you put in is already taxed. That means that when you withdraw the money, you don't have to pay taxes again.
This means that when you receive distributions from these types of accounts, they are tax free. Of course, you have to wait until after you are 59.5 in addition to having had the account for at least five years in order to withdraw without penalty.
When you receive distributions from a Roth account, it doesn't impact your taxable income calculation. This means that you won't have to pay an increased tax on the Social Security benefits you receive.
If you receive distributions from a traditional 401(k) or a traditional IRA, though, you are receiving taxable income.
Buy an Annuity Contract
Another option is buying an annuity contract. A qualified longevity annuity contract (QLAC) is a particular kind of deferred annuity. It is funded using an IRA or using another kind of qualified retirement plan.
These are contracts that provide monthly payments for the rest of your life. Protected from the experience of dips in the stock market, there are some appealing benefits of this strategy. It is also exempt from the RMD rules until the specified annuity starting day and the beginning of payments so long as it complies with IRS requirements.
Basically, this strategy can help you limit distributions and therefore taxable income while you are in retirement.
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What About Survivor, Spousal, SSI, and Disability Benefits?
Survivor, Spousal, and Disability benefits all fall under the same basic rules as described above. However, Social Security Income has different parameters.
Social Security Income, or SSI, isn't considered Social Security. This is a program that is based on need for people who are disabled, blind, or over the age of 65. The benefits received through this program aren't considered taxable income.
What Percent of My Social Security Is Considered Taxable Income?
If you make less than $25,000 during the tax year as a single person, then you won't have to pay any taxes on your Social Security benefits. However, half of this income is taxable if you made between $25,000 and $34,000. Any more than this in terms of income means that you can be taxed on up to 85% of your social security benefits.
If you file taxes jointly with your spouse, you won't pay taxes on your SS income if you make less than $32,000 combined. However, more than this amount and less than $44,000 means up to half of your SS income is taxes. If you make more than $44,000 as a couple, up to 85% of your benefits are considered taxable income.
What About State Taxes?
There are thirteen states in the United States that tax Social Security benefits in specific cases. These are:
- West Virginia
- Rhode Island
- New Mexico
- North Dakota
This means that you might have to pay state tax in addition to federal tax on your Social Security benefits. There are a number of different criteria that can determine whether or not your Social Security income is subject to state tax, including income.
(If you're starting to think about Social Security income, you likely also have questions about Medicare. You can learn more about the eligibility age here.)
Is Social Security Income Considered Income?
Social Security income is considered income in the eyes of the IRS. That being said, you can work to be financially saavy in order to minimize how much money you owe to the IRS.
You might consider using a Roth IRA account or another retirement savings account to help shield your income from tax. You can then deal with the taxes before you retire but after the after of 59.5 in order to deal with the taxes before you no longer have income.
(Are you trying to figure out how to receive healthcare in retirement? Learn about the differences between Medicare and Medicaid here.)
Social Security and Taxes: Knowledge Is Power
No one likes dealing with taxes, but understanding what your tax burden is and how to reduce it is essential to financial wellness. For this reason, it's a good idea to understand the answer to the question “is Social Security Income Taxable?”
If you have any other sources of income other than Social Security benefits, there's a good chance your SS benefits will be taxed. This is because the limits for taxable income haven't been raised since the 80s when the cost of living was significantly different.
Understanding the tax implications of your Social Security benefits can mean that you can plan ahead. When you have the chance to pay ahead, you can figure out legal ways to reduce your taxable income in retirement. This can mean less stress and more money during the best years of your life!
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