How Are My Social Security Benefits Taxed?
This may come as a surprise, but Social Security benefits are not completely tax-free. Your income in retirement will determine how much of your Social Security benefits are subject to tax. You may have retirement income from a pension, retirement accounts, or you have a part-time job to keep you busy. The more income you have, the higher the chance of paying taxes on your Social Security benefits.
When determining how much you may be taxed, you need to calculate your “combined income.” Combined income includes your adjusted gross income (AGI), nontaxable interest, and half of your Social Security benefits. After you add these numbers together, you will be able to determine what percentage of your benefits are taxed. Below is a breakdown of the taxable portion of Social Security benefits based on income levels for both single and married couples.
| Filing Status | Combined Income | Taxable Portion on Benefits |
|---|---|---|
| Single | $25,000 – $34,000 | Up to 50% |
| Single | Over $34,000 | Up to 85 % |
| Married Filing Jointly | $32,000 – $44,000 | Up to 50% |
| Married Filing Jointly | Over $44,000 | Up to 85% |
Let’s walk through an example for a single tax filer. Let’s say you received $15,000 in Social Security benefits this year. You also had $22,000 in other income. If we add these two together, you have gross income of $$37,000. Your combined income is only $29,500 (other income + half of your Social Security benefit). This is within the $25,000 to $34,000 range and 50% of your benefit would be taxable.
Using a different scenario for a married couple, let’s say combined Social Security benefits are $25,000. There is also $35,000 in other income. This couple’s gross income would be $60,000. But their combined income would be $47,500. This amount falls in the $32,000 to $44,000 range and 50% of benefits would be taxable.
If you think some of your Social Security benefits will be taxable, it’s important to plan ahead. You can request that federal income taxes be withheld from your monthly payments. To do this, you must fill out Form W-4V which you can download from the IRS’ website. You may choose to withhold 7%, 10%, 12%, or 22%. Once filled out, find the closest Social Security office to you and fax or mail the completed form. If you prefer to not have taxes deducted from your monthly Social Security payments, you can always make quarterly estimated tax payments.
There are simple ways you can keep your Social Security benefits free from income tax. You would want to keep your income as low as possible, which may not be realistic for everyone. Utilizing Roth accounts for income is one way because withdrawals are tax free. Or if you retired but haven’t filed for Social Security yet, you can withdraw taxable income from retirement accounts. This would result in drawing down those fully taxable accounts early on and living off Roth IRA money and Social Security benefits once you file.
It’s important to understand how these benefits are taxed so that you are not surprised when filing your tax return. If you haven’t filed for Social Security yet, try to strategize now so you have a clear plan to minimize taxes in retirement. You may want to work with a CPA or financial planner to help develop these strategies. A financial professional will be able to forecast not only how much of your benefits are taxable, but the tax implications as well.