Social Security taxable rules: Secure your retirement
When it comes to Social Security benefits, many Americans wonder whether they’re required to pay taxes on these payments.
The short answer is yes, for most people. In fact, Social Security taxable income has been a concern since the 1980s.
While you don’t pay taxes on all your Social Security income, you may have to pay taxes on a portion, depending on your total income.
How much of your social security income is taxable?
Social Security benefits are taxed when your combined income exceeds certain thresholds. But, it’s not as simple as a flat tax rate on all your benefits.
The Social Security taxable portion can range from 50% to 85% of the benefits you receive, depending on your total income.
To determine how much of your Social Security taxable benefits are, the IRS uses your “combined income,” which is calculated as your adjusted gross income (AGI), tax-exempt interest, and half of your Social Security benefits.
For example, if you’re an individual earning $25,000 or more, up to 50% of your Social Security benefits could be taxed. If your income exceeds $34,000, then up to 85% of your benefits may be taxable.
For couples filing jointly, the thresholds are $32,000 and $44,000, respectively.
What Affects the Taxability of Your Benefits?
Your Social Security benefits are considered taxable if your combined income is over a certain level. Here’s the formula:
Combined Income = AGI + Nontaxable Interest + Half of Social Security Benefits
If this number surpasses the tax threshold, the IRS considers part of your Social Security taxable.
However, don’t worry, this doesn’t mean that every dollar of your Social Security is taxed—just the portion that goes over the income limits.
Who pays taxes on social security?
Not everyone has to pay taxes on their Social Security benefits. If you have little or no other sources of income, it’s likely that your benefits won’t be taxed.
Retirees with income solely from Social Security benefits typically won’t face a tax bill.
But if you have other sources of income, like wages or retirement plan distributions, then the IRS will look at your total income to decide how much of your Social Security taxable income is.
Here’s a breakdown of how taxes apply based on your income:
- Individual with a combined income of $25,000–$34,000: Up to 50% taxable;
- Individual with a combined income over $34,000: Up to 85% taxable;
- Married couple (filing jointly) with a combined income of $32,000–$44,000: Up to 50% taxable;
- Married couple (filing jointly) with a combined income over $44,000: Up to 85% taxable;
Can you avoid taxes on your Social Security?
While some people will pay taxes on their Social Security benefits, there are strategies that can help reduce the amount of taxable income you have.
This way, you can minimize the taxes owed on your Social Security taxable benefits.
Use roth IRAs to reduce taxable income
One of the most effective ways to limit taxes on your Social Security benefits is by contributing to a Roth IRA or Roth 401(k).
Contributions to these accounts are made with after-tax money, and any withdrawals made after you turn 59½ are tax-free.
This means that Roth distributions won’t count as taxable income, which in turn won’t increase the taxes on your Social Security taxable income.
Withdraw taxable income before retirement
Before you start receiving Social Security benefits, consider withdrawing from other taxable retirement accounts.
This strategy can reduce your taxable income and thus lower the taxes owed on your Social Security taxable benefits when you retire.
The idea is to reduce taxable income before you begin drawing Social Security.
Consider annuities to lower taxable income
Another strategy is purchasing a qualified longevity annuity contract (QLAC). This type of annuity is funded by a traditional IRA or retirement plan, and you can delay receiving payments until age 85.
Since QLACs provide income later, they can reduce your overall taxable income during retirement, thus helping to lower the Social Security taxable portion.
State Taxes on Social Security
While Social Security benefits are not taxed by the federal government for many retirees, that’s not the case in every state.
Nine states tax Social Security benefits in varying degrees. These include:
- Colorado
- Connecticut
- Minnesota
- Montana
- New Mexico
- Rhode Island
- Utah
- Vermont
- West Virginia
If you live in one of these states, be sure to check with your state’s tax agency to understand how they tax Social Security benefits.
How to Avoid Surprises at Tax Time
The IRS provides a helpful resource called the Interactive Tax Assistant (ITA) to help you figure out whether any of your Social Security benefits are taxable.
This tool will guide you through the process and ensure you’re not caught off guard when it’s time to file your taxes. Additionally, keep an eye out for the SSA-1099 form, which shows the total amount of Social Security benefits you received during the year and will help you determine whether you owe taxes.
In conclusion, while Social Security taxable benefits are a concern for many retirees, there are various ways to limit how much you owe in taxes.
By carefully planning and using strategies like Roth accounts or annuities, you can minimize your tax burden and enjoy more of your hard-earned benefits.
