Is Social Security Taxable?

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Is Social Security Taxable?

Is Social Security income taxed? It is for the vast majority of Americans. That is, the vast majority of persons who receive Social Security benefits pay income tax on up to 50% or even 85% of their payments because their total income from Social Security and other sources exceeds the very low tax limits.

To reduce the amount of tax you pay on Social Security payments, you may adopt one of three strategies: deposit some retirement income in Roth IRAs, remove taxable income before retiring, or buy an annuity.

Key Takeaways

  • Up to 50% of Social Security income is taxable for individuals with a total gross income including Social Security of at least $25,000 or couples filing jointly with a combined gross income of at least $32,000.
  • Up to 85% of Social Security benefits are taxable for an individual with a combined gross income of at least $34,000 or a couple filing jointly with a combined gross income of at least $44,000.
  • Retirees with little income other than Social Security generally won’t be taxed on their benefits.
  • Your focus should be on paying less overall taxes on your combined income.
  • A Roth IRA, for example, is a tax-advantaged retirement plan that may aid.

How Much of Your Social Security Income Is Taxable?

Since 1983, Social Security benefits have been taxed beyond certain income limitations. Because there have been no inflation changes to those restrictions since then, most persons who get Social Security benefits and have other sources of income pay some tax on the payments.

No taxpayer, regardless of income, gets all of their Social Security payments taxed. The highest level provides 85% of the entire benefit. The Internal Revenue Service (IRS) estimates how much is taxed as follows:

  • Your adjusted gross income (AGI) from Social Security and all other sources is the starting point for the computation. Wages, self-employment earnings, interest, dividends, required minimum distributions (RMDs) from eligible retirement accounts, and other taxable income may be included.
  • Then, tax-exempt interest is added. (It is not taxed, but it is included in the computation.)
  • If your total income exceeds the minimum taxable threshold, at least half of your Social Security payments will be deemed taxable income. To calculate your net income, you must first take the standard deduction or itemize your deductions. The amount you owe is determined by where your number falls in the federal income tax tables.

Combined Income = Adjusted Gross Income + Nontaxable Interest + Half of Your Social Security Benefits

The key to lowering taxes on your Social Security payment is to decrease your taxable income when you retire, not your overall income.

Individual Tax Rates

If you file a federal tax return as an individual and your total gross income from all sources is as follows, your benefits will be taxed:

  • Between $25,000 and $34,000: You may be required to pay income tax on up to 50% of your benefits.
  • More over $34,000: You may be taxed on up to 85% of your benefits.

If you receive Social Security payments, the IRS publishes a worksheet that may be used to compute your total income taxes owed. If your gross income reaches $25,000 for an individual or $32,000 for a couple, you will discover that your taxable income has risen by up to 50% of the amount you received from Social Security. If your combined income reaches $34,000 for a person or $44,000 for a couple, the taxable proportion jumps to 85% of your Social Security benefit.

Assume you were an individual taxpayer who got the typical amount of Social Security: around $18,000. In addition, you had $20,000 in “other” income. When you add the two, you obtain a gross revenue of almost $38,000. However, your combined income is barely $29,000. (other income plus half of your Social Security benefits).That is in the $25,000-$34,000 area for a 50% tax on your benefits. So, your taxable amount is half of the difference between that income and the $25k threshold: ($28,000 – 25,000 = $3,000; $3,000/2 = $1,500). For taxpayers with multiple types of income, the computation might get more difficult.

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Married Tax Rates

If you and your spouse have the following total income and file a joint return, your benefits will be taxable:

  • Between $32,000 and $44,000: You may be required to pay income tax on up to 50% of your benefits.
  • More over $44,000: You may be taxed on up to 85% of your benefits.

Assume you are a semi-retired couple filing jointly with a total Social Security benefit of $26,000. You also made $30,000 in “other” income. When you add the two, you obtain a gross income of $56,000. Your total Social Security income is $43,000. (other income plus half of your Social Security benefits).This combined income is between $32,000 and $44,000, which means that half the difference between the income and the threshold is calculated at 50% to determine your taxable amount: ($43,000-32,000 = $11,000; $11,000/2 = $5,500).

Social Security Benefits Tax Tool

Because this is the IRS, the simple example above may not apply to you. The IRS’s Interactive Tax Assistant (ITA) will walk you through the potential complexities and compute how much of your income is taxed. The tax regulations for benefits are described in IRS Notice 703.

Are Spousal, Survivor, Disability, and SSI Benefits Taxable?

Except for Supplemental Security Income, these programs follow the same broad regulations as the Social Security program for retirees (SSI).

Spousal Benefits

If you do not have Social Security benefits but get spousal Social Security payments based on the benefits of your married spouse, the requirements are the same as for all other Social Security beneficiaries. If your income exceeds $25,000, you will be required to pay taxes on up to 50% of the benefit amount. If your income exceeds $34,000, the proportion jumps to 85%.

Survivor Benefits

Survivor payments granted to children are seldom taxed since few children earn enough money to be taxed. Parents or guardians who receive benefits on behalf of their children are not required to record them as income.

Disability Benefits

Social Security disability payments are taxed in the same way as Social Security retiree benefits. If the recipient’s gross income exceeds a specific threshold, benefits are taxed. The current exemption amount is $25,000 for an individual and $32,000 for a married couple filing jointly.

SSI Benefits

SSI is a needs-based program for persons who are blind, handicapped, or 65 or older. It is not Social Security. SSI payments are not taxed.

Paying Taxes on Social Security

Each January, you should get a Social Security Benefit Statement (Form SSA-1099) detailing your benefits for the prior tax year. It might help you figure out if you owe federal income tax on your benefits. If you enroll on the Social Security website, you may access the information.

If you owe taxes on your Social Security benefits, you may make quarterly estimated tax payments to the IRS or have federal taxes deducted from your payments before they are sent to you.

State Taxes on Social Security

In certain situations, twelve states tax Social Security payments. If you reside in one of the following states: Colorado, Connecticut, Kansas, Minnesota, Missouri, Montana, Nebraska, New Mexico, Rhode Island, Utah, Vermont, or West Virginia, contact your state tax department. As with the federal tax, how these entities tax Social Security varies depending on income and other factors.

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The monthly average Social Security retirement payout is $1,534.81. That equates to $18,417.72 each year.

3 Ways to Avoid Taxes on Benefits

The easiest approach to maintain your Social Security payments tax-free is to keep your total combined income below the tax-paying criteria. However, this may not be a realistic objective for everyone, therefore there are three options for reducing your tax liability.

  • Put retirement funds in Roth IRAs.
  • Before retiring, withdraw taxable income.
  • Purchase an annuity

Place Some Retirement Income in Roth Accounts

Roth IRA and Roth 401(k) contributions are made after-tax monies. This implies they are not taxed when the monies are taken. Thus, withdrawals from your Roth IRA are tax-free if made after you reach 5912 and have owned the account for five years or longer. As a consequence, the Roth distribution will not change your taxable income computation or the tax you owe on your Social Security payments. Conventional IRA and traditional 401(k) plan distributions, on the other hand, are taxed.

Because of the Roth advantage, it is prudent to explore a combination of normal and Roth retirement funds long before retirement age. The combination will provide you more flexibility in managing withdrawals from each account and will reduce the taxes you owe on your Social Security income. A similar impact may be obtained by limiting your withdrawals from traditional savings, money market, or tax-sheltered accounts.

Withdraw Taxable Income Before Retirement

Another approach to reduce your taxable income while receiving Social Security is to maximize, or at the very least raise, your taxable income in the years before the start of payments.

You may be at your prime earning years between the ages of 591 and retirement. Take money from your retirement account and pay the taxes on it. You may then utilize it later without increasing your taxable income.

This means you may be able to withdraw cash from tax-sheltered retirement accounts, such as IRAs and 401(k)s, earlier than usual. After the age of 5912, you may make penalty-free distributions. This implies that you will not be penalized for making these withdrawals too early, but you will still have to pay income tax on the amount you remove.

Because withdrawals are taxed (unless they are from a Roth account), they must be carefully planned with the other taxes you will pay that year in mind. The idea is to pay less tax by withdrawing more during this pre-Social Security period than you would once you start drawing benefits. This necessitates taking into account the overall tax bite from withdrawals, Social Security income, and other sources. Remember that you must take RMDs from these accounts at the age of 72, so you must prepare for those mandated withdrawals.

Another advantage of utilizing these distributions to supplement your income while you’re retired or approaching retirement is that you may be able to postpone filing for Social Security benefits, which will raise the amount of the payments.

Purchase an Annuity

A qualified longevity annuity contract (QLAC) is a kind of delayed annuity that is financed with money from a qualified retirement plan or an IRA. QLACs offer lifetime payouts and are immune to stock market downturns. As long as the annuity meets IRS standards, it is free from the RMD restrictions until distributions commence following the annuity’s commencing date.

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QLACs may assist reduce the tax hit taken from your Social Security payments by restricting distributions (and consequently taxable income) throughout retirement. Under current guidelines, a person may use 25% of a retirement savings account or an IRA (whichever is smaller) to purchase a QLAC with a single premium. The QLAC pays out for as long as the person lives.

Income from the QLAC may be postponed until the age of 85. A joint annuitant may be a spouse or someone else, which means that both stated persons are insured regardless of how long they live.

Remember that a QLAC should not be purchased just to reduce taxes on Social Security income. Retirement annuities contain benefits and drawbacks that should be carefully considered, ideally with the assistance of a retirement counselor.

How Do I Determine If My Social Security Is Taxable?

Total your yearly gross income, including Social Security. If you have little or no income other than Social Security, you won’t have to pay taxes on it. If you are an individual filer with at least $25,000 in gross income for the year, including Social Security, up to 50% of your Social Security payments may be taxed. The minimum for a married couple filing jointly is $32,000. If your gross income is $34,000 or more (or $44,000 or more for a couple), up to 85% of it may be taxed.

What Percentage of Social Security Is Taxable?

If you file as an individual, your Social Security benefits are not taxed if your total annual income is less than $25,000. If your income is between $25,000 and $34,000, half of it is taxed. If you have a higher income, up to 85% of your benefits may be taxed.

If your combined income is between $32,000 and $44,000, you’ll owe taxes on half of your benefits if you file jointly. If your income exceeds that amount, up to 85% of it is taxed.

Do I Have to Pay State Taxes on Social Security?

Thirty-eight states don’t tax Social Security payments. The remaining 12 tax some receivers in certain conditions.

Does Social Security Income Count As Income?

Yes, but you may reduce the amount you owe each year by making prudent decisions before and after retirement. Consider putting part of your retirement funds into a Roth IRA to avoid paying income taxes on withdrawals. Take out some retirement funds after you reach the age of 5912, but before you retire, to cover anticipated Social Security taxes before you begin receiving benefit payments. You might also speak with a financial adviser about purchasing a retirement annuity.

At What Age Is Social Security No Longer Taxed?

Social Security is taxed based on total income rather than age; nevertheless, the taxable amount fluctuates from zero to 85% depending on total income.

The Bottom Line

The majority of Social Security benefit advice focuses on when you should begin receiving benefits. The quick solution is to wait until you’re 70 to maximize your benefits. Another thing to think about is how to keep your Social Security payments from eating up a large portion of your entire retirement income. The solution is to prepare ahead of time to reduce your total tax burden throughout your retirement years.

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