For those who have never had Social Security Benefits on their tax return, it’s important to understand how Social Security is taxed. Many people believe that this type of income is never taxed, but this is not always the case. The amount of your benefits that is subject to tax is based on your total combined income. Additionally, because Social Security is not taxed upfront like normal wages, many retirees find themselves blindsided by large tax bills when they file their tax returns. So, if you’re receiving benefits this year for the first time, here’s what you can expect when it comes to the tax on your Social Security income. Remember, Supplemental Security Income (SSI) is different from Social Security (OASDI) Benefits and is not taxable. SSI is generally for those who have low income or are disabled.
Income Thresholds and Tax
As we already mentioned, the amount of your Social Security income that will be taxed is based on your total combined income (your Social Security, plus any other sources of income you might have). Here are the current thresholds for taxes on Social Security income:
Social Security benefits are not taxed if your total income is below $25,000 for individual filers, or below $32,000 for joint filers. For individuals with income between $25,000 and $34,000 (or for couples with income between $32,000 and $44,000), as much as 50% of your benefits may be subject to tax. If your individual income is over $34,000, or over $44,000 for couples filing jointly, up to 85% of your Social Security income may be taxable.
Please note that the percentages given above are the portion of your benefits that will be considered taxable income; it does not mean that you will lose that percentage of your benefits to taxes. Rather, your standard tax rate will simply be applied to that percentage of your Social Security income, while the rest is not taxed.
In cases where Social Security income is the sole source of income, it’s uncommon for your benefits to be taxed at all. However, if you have supplementary income that raises your total income over the above-mentioned threshold, it’s important that you plan to pay taxes on a portion of your benefits.
Can You Reduce the Taxes on Your Social Security Benefits?
Taxes on Social Security income can be especially hard to stomach for two reasons:
The individuals receiving this benefit are often on a fixed income, and Social Security is not taxed upfront, so the amount due when you file is typically higher than on income that has already had withholdings taken out of it.
If you’re worried about the amount that you’re going to owe on your Social Security income taxes, there are a few things you can do to help reduce the taxes on your benefits.
Voluntary withholdings – Your first option is to sign up for voluntary withholdings on your Social Security check. Just as you can adjust withholdings on a standard paycheck, you can do the same on your Social Security benefits. To do this, you simply need to fill out IRS Form W-4V, which you can find on the IRS’s website here. Alternatively, you can call the Social Security Administration and request to have a copy of the form sent to you.Draw down other accounts first – If you’ve just recently retired, it might be beneficial to wait before signing up for your Social Security benefits. Since having additional sources of income (like distributions from retirement accounts) can push your income over those thresholds, using up your retirement funds first can help you to avoid tax on your benefits when you start receiving it.Careful planning – Finally, take steps to monitor your income and properly plan for your taxes. Since you now know the income thresholds for SSI taxes, you can be more proactive about monitoring your income and ensuring that it doesn’t unexpectedly rise above those thresholds. And of course, we can help with this if you need it.
Additional Notes on Taxes on Retirement
A few final notes before we wrap up this article: First, it’s important to be aware what sources of income are taxable so that you can better take control of your finances during your retirement. For example, withdrawals from a Roth IRA will not make your Social Security taxable on their own, so you can use these accounts to supplement your Social Security income without worrying about your benefits being taxes because of it.
Additionally, the aforementioned thresholds only apply to federal taxes applied to Social Security benefits. Roughly half of the states in the US apply their own taxes to Social Security, so it’s important to be aware of what those tax rates are. For example, Utah does not exempt Social Security retirement benefits; so the state income tax rate of 4.95% will be applied to your taxable Social Security Benefits.
For further help and advice with your taxes, contact The Accounting Guys today. Our expert tax planners in Provo will work with you so there are no surprises when you file your tax return, and will help you to take control of your finances in retirement. Call to schedule your appointment today.