Taxation of Social Security
Eligibility for Social Security payments starts at the age of 62, although many seniors wait until they are older to earn bigger benefit amounts. The Internal Revenue Service (IRS) determines whether Social Security payments are taxable based on the amount of extra income received by the individual filing taxes. Some states levy benefits taxes as well.
- After the age of 62, Social Security payments may or may not be taxed, depending on other income obtained.
- Those who exclusively receive Social Security payments are exempt from paying federal income taxes.
- Whether you get additional income, you must compare it to the IRS threshold to see if your benefits are taxed.
- Thirteen states have some kind of taxation on Social Security payments.
How to Determine If Social Security Benefits Are Taxable
Seniors who receive Social Security as their only source of income are not required to pay federal income taxes on their payments. If they have other sources of income, such as tax-free interest, they must add one-half of their yearly Social Security payments to their other income and compare the total to an IRS-set level. If the sum exceeds the IRS threshold, part of their Social Security payments will be taxed.
The threshold amount for individuals is $25,000 in 2020, and $32,000 for married couples filing jointly. Married couples that live together but file separately have a $0 barrier and must pay Social Security taxes regardless of other income generated.
Your combined income is calculated by combining your adjusted gross income, nontaxable interest, and half of your Social Security benefits. A part-time work or 401(k) withdrawals might contribute to your other income, which is included in your adjusted gross income.
Social Security payouts are taxed in the following ways:
- On income of $25,000 to $34,000 for individuals or $32,000 to $44,000 for married couples filing jointly, up to 50% of Social Security payments are taxed.
- If an individual’s or couple’s income exceeds $34,000 or $44,000, up to 85% of benefits are taxed.
Taxable Social Security Benefits
Assume your Social Security payments are taxed depending on your total income. The amount of tax you pay is determined on your income. The difference between your combined income and the IRS base amount (for example, $25,000 for single taxpayers).
More than 85% of your Social Security income will never be taxed.
Under certain conditions, these thirteen states tax Social Security benefits:
- New Mexico
- North Dakota
- Rhode Island
- West Virginia
Iowa used to tax benefits, but it phased them out altogether in 2014, while New Mexico exempts certain benefits for people over the age of 65. These states tax Social Security payments in different ways, including using adjusted gross income or other data.
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