What Do You Mean, There Could Be a Tax on Social Security?
Retires Can Actually Have to Pay Income Tax on Social Security Benefits
As a tax preparer, I have had more than one taxpayer express surprise (outrage?) over the fact that their social security income would actually be taxable. A married couple, both over age 62 and collecting social security benefits, who, in addition to some interest income and a small pension, continued to both work part-time. Despite having tax taken out of their paychecks and the pension, with the inclusion of part of their social security benefit as taxable income, they owed over $1000!
Most retired people believe that their social security benefit is tax-free. For the most part, and for many retirees, this is true, especially when social security is their only source of income. These retirees may not even have to file a tax return. Supplemental security income payments (SSI) are not taxable.
But, add a pension or an IRA distribution, combine it with some taxable or even tax-free interest, and mix in some dividends, capital gains, or earned income; then, depending on your filing status, your social security benefit may become taxable.
The amount of your social security benefit that is taxable depends on your total income and filing status. Up to 85% of your social security benefit may be included as taxable income on your income tax return. Not only may it be taxable, it could even push you into a higher tax bracket!
To Estimate if Some of Your Social Security Benefit May Be Taxable:
1. Add together all of your income, including earned income, distributions from pensions, 401(k)s, IRAs, taxable and tax-exempt interest, dividends, capital gains, and also include items usually excluded from income such as interest on savings bonds or foreign earned income.
2. To the total from #1, add 1/2 of the total social security benefit you (and your spouse if filing jointly) received (as reported on a form SSA-1099). This is your "combined income."
3. If you file as an individual and your combined income is
a. between $25,000 and $34,000: You may owe federal income tax on up to 50% of your benefit.
b. over $34,000: Up to 85% of your benefit may be taxable.
4. If you file MFJ (married filing jointly) and your combined income with your spouse is
a. between $32,000 and $44,000: Up to 50% of your benefit may be taxable.
b. Over $44,000: Up to 85% of your benefit may be taxable.
Save Yourself a Tax Bill at Tax Time
If you owe tax on a portion of your social security benefit, you can save yourself a tax bill at tax time. In addition to having tax withheld from your paycheck, pension or IRA distribution, you can have tax withheld from your social security benefit. Complete a Form W-4V Voluntary Withholding Request and file it with the Social Security Administration.
For more information, see IRS Publication 915, Social Security and Equivalent Railroad Retirement Benefits.
Tax diversification can reduce your tax liability in retirement and potentially decrease the portion of your social security benefit subject to income tax.
This article is accurate and true to the best of the author’s knowledge. Content is for informational or entertainment purposes only and does not substitute for personal counsel or professional advice in business, financial, legal, or technical matters.
© 2012 Mark Shulkosky