How Much Of Your Social Security Income Is Taxable
Social Security payments have been subject to taxation above certain income limits since 1983. No inflation adjustments have been made to those limits since then, so most people who receive Social Security benefits and have other sources of income pay some taxes on the benefits.
However, regardless of income, no taxpayer has all their Social Security benefits taxed. The top level is 85% of the total benefit. Heres how the Internal Revenue Service calculates how much is taxable:
- The calculation begins with your adjusted gross income from Social Security and all other sources. That may include wages, self-employed earnings, interest, dividends, required minimum distributions from qualified retirement accounts, and other taxable income.
- Tax-exempt interest is then added.
- If that total exceeds the minimum taxable levels, then at least half of your Social Security benefits will be considered taxable income. You must then take the standard or itemize deductions to arrive at your net income. The amount you owe depends on precisely where that number lands in the federal income tax tables.
Combined Income = Adjusted Gross Income + Nontaxable Interest + Half of Your Social Security Benefits
The key to reducing taxes on your Social Security benefit is to reduce the amount of taxable income you have when you retire, but not to reduce your total income.
Vermonts Social Security Exemption
Vermonts personal income tax exemption of Social Security benefits reduces tax liabilities mainly for lower- and middle-income Vermonters who are retired or disabled. It does this by excluding from taxable income all or part of taxable Social Security benefits reported on the federal Form 1040, U.S. Individual Income Tax Return, which are included in federal AGI. The exemption does not exclude other types of income.
For those who are married filing jointly and civil union partner filing jointly, the exemption applies in full up to an AGI of $60,000, phases out between $60,000-$70,000, and does not apply to filers with AGI greater than or equal to $70,000. For all other filing statuses, the Vermont exemption applies in full to an AGI up to $45,000. It then phases out smoothly for filers earning between $45,000-$55,000. It does not apply to filers with AGI greater than or equal to $55,000. The exemption reduces a taxpayers Vermont taxable income before state tax rates are applied.
Table 2 illustrates how the Vermont exemption is applied by filing status and income level. Graph 1 shows the percentage of taxable Social Security benefits that are exempt from Vermont taxable income based on filing status and AGI.
Do Phoenix Retirees Get A Bigger Cola
That’s a reasonable question, given that the latest reading for Phoenix inflation was 13% in August compared to recent national levels closer to 8%. But, no, the Social Security COLA applies universally, across the nation.
“It will not reflect geographical differences in real prices and living costs,” Arnone said. “Thus, it will undercompensate some beneficiaries and overcompensate others.”
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How To Calculate Your Social Security Benefit Taxes
Just because you could owe taxes on up to 50% or 85% of your Social Security benefits doesn’t mean you’ll actually owe taxes on that amount. If you fall into the 50% taxation range, the government says you should owe taxes on the lesser of half of your Social Security benefits or half of the difference between your combined income and the taxation threshold set by the IRS for your tax filing status.
Examples make this easier to understand, so let’s consider an individual who receives $12,000 in Social Security benefits annually and has a combined income of $30,000. You’d calculate the amount they’d owe taxes on this way:
Things get even more complicated if you fall into the 85% taxation range. If our individual had a combined income of $40,000 instead and still received $12,000 in annual Social Security benefits, you would calculate how much they would owe in taxes this way:
Determining If You’ll Owe Social Security Benefit Taxes
The Social Security Administration sets the following thresholds when calculating Social Security benefit taxes based on your combined income and tax filing status:
All Other Tax Filing Statuses
More than $34,000
Source: Social Security Administration. Married Filing Separately column assumes you lived with your spouse at any point during the year. If this is not true, refer to the All Other Tax Filing Statuses column.
If you fall into the 0% taxation range for your tax filing status, you won’t have to worry about paying any taxes on your benefits at all. If you land above this range, you will owe taxes on your benefits and you can figure out how much using the formula below.
Things are a little trickier for married couples filing separately than for other tax filing statuses. If you lived together at any point during the year, you will owe taxes on up to 85% of your benefits, regardless of your combined income. But if you didn’t live together at all, you’re subject to the same taxation rules as individuals, heads of household, and qualifying widows.
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Social Security Benefits Havent Always Been Taxable
In the beginning of Social Security, benefits were not taxable. That all changed in 1983 when the Social Security Act was amended.
The new rule made up to 50% of Social Security benefits taxable for certain individuals.
In 1993, the Deficit Reduction Act expanded the taxation of Social Security benefits.Under this Act, an additional bracket was added where up to 85% of Social Security benefits could be taxable above certain thresholds.
This combination of laws resulted in the current Social Security tax structure.
Since those taxable brackets have been added, theyve never been changed! Needless to say, wages have increased between then and now. If you look at Social Securitys revenue, it is even more evident. During the last decade alone, Social Security tax revenues have doubled!
Up To 85% Of A Taxpayer’s Benefits May Be Taxable If They Are:
- Filing single, head of household or qualifying widow or widower with more than $34,000 income.
The Interactive Tax Assistant on IRS.gov can help taxpayers answer the question Are My Social Security or Railroad Retirement Tier I Benefits Taxable?
The tax filing deadline has been postponed to Wednesday, July 15, 2020. The IRS is processing tax returns, issuing refunds and accepting payments. Taxpayers who mailed a tax return will experience a longer wait. There is no need to mail a second tax return or call the IRS.
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Reporting Your Social Security Income
To report your Social Security income, you can use Form 1040 or 1040-SR. If you receive Social Security income, you will likely get a form from the Social Security Administration called SSA-1099, which has your total benefit amount received for the year in box 5. Enter the total on line 6a and the taxable portion on line 6b. If no amount is taxable, enter -0- on line 6b.
Control Your Capital Gains And Harvest Your Losses
During bull markets, the capital gains that retirees can generate when they sell investments to cover living expenses can be a big contributor to getting more of their Social Security taxed. For every $1,000 in additional capital gains you have, you could potentially add $500 to $850 to the amount of your Social Security benefits that you’ll have to include as taxable income.
If you can avoid those gains or defer them to another year, it could help you avoid paying more taxes on your benefits. Moreover, if you can harvest capital losses on losing investments, it could help offset not only gains on other investments but also up to $3,000 of other types of income each year. That could end up saving you hundreds of dollars in taxes.
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How Much Is Taxable
Generally, up to 50% of benefits will be taxable. However, up to 85% of benefits can be taxable if either of the following situations applies.
- The total of one-half of the benefits and all other income is more than $34,000 .
- You are filing Married Filing Separately and lived with your spouse at any time during the year.
Who is taxed. Benefits are included in the taxable income for the person who has the legal right to receive the benefits.
Example: Lisa receives Social Security benefits as a surviving spouse who is caring for two dependent children, Christopher, age 9, and Michelle, age 7. As dependents of their deceased father, Christopher and Michelle also receive Social Security benefits. The benefits for Christopher and Michelle are made payable to Lisa. When calculating the taxable portion of the benefits received, Lisa uses only the amount paid for her benefit.
The amounts paid for Christopher and Michelle must be added to each childâs other income to see whether any of those benefits are taxable to either of the children.
Withholding. You can choose to have federal income tax withheld from Social Security or Railroad Retirement benefits by completing Form W-4V, Voluntary Withholding Request.
Are Survivor Benefits Considered Household Income
For tax filers, Social Security income will always be includ- ed as part of total household income. Social Security income, such as survivors benefits, is con- sidered unearned income, but separate Internal Revenue Service rules govern whether it should be counted toward the tax filing threshold.
How long can a widow collect survivor benefits?
Widows and widowers These benefits are payable for life unless the spouse begins collecting a retirement benefit that is greater than the survivor benefit. Beneficiaries entitled to two types of Social Security payments receive the higher of the two amounts.
Is the $255 Social Security death benefit taxable?
The special $255 lump-sum death benefit isnt taxable and shouldnt be reported on your return. The Social Security Administration has more information about this $255 death benefit.
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Balance Retirement Distributions Across Roth And Regular Accounts
Lastly, those fortunate enough to have both traditional and Roth-style retirement accounts can control their provisional income by planning their distributions from both types. Roth distributions don’t count toward provisional income, so taking more from a Roth in a given year can reduce the amount of your Social Security that gets taxed.
Nobody wants to pay more tax than they have to, and having your hard-earned Social Security benefits go to the IRS adds insult to injury. By following these three suggestions, though, you might be able to pay less in income taxes on your Social Security.
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State Tax On Benefits
Since most states do not tax benefits, most Americans only need to know federal tax rules. However, 13 states do tax Social Security for at least some seniors. These include:
Benefits are taxed differently in each of the above-named states. The links lead to the website of each states taxing authority so you can check the guidelines that apply where you live. In most cases, low income retirees are exempt from state tax on at least part of their Social Security income. Consequently, state taxes on retirement benefits are of primary concern to middle-class and wealthy retirees.
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To Find Out If Their Benefits Are Taxable Taxpayers Should:
- Take one half of the Social Security money they collected during the year and add it to their other income.
Other income includes pensions, wages, interest, dividends and capital gains.
- If they are single and that total comes to more than $25,000, then part of their Social Security benefits may be taxable.
- If they are married filing jointly, they should take half of their Social Security, plus half of their spouse’s Social Security, and add that to all their combined income. If that total is more than $32,000, then part of their Social Security may be taxable.
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How much of your Social Security income is subject to tax depends on a variety of factors, including your federal income tax filing status and your modified adjusted gross income. But with a little up-front planning, which can include everything from rebalancing your portfolio to structuring certain transactions in the right way, you may reduce the possibility of taxes derailing your plans.
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Taxation Of Benefits Is Progressive
Taxes on Social Security benefits fall more heavily on high-income than low-income taxpayers. Thats both because a larger share of benefits is taxable for high-income taxpayers and because they face higher marginal income tax rates.
About half of Social Security beneficiaries pay no tax on their benefits because their incomes are below $25,000 , according to the Congressional Budget Office . At the other end of the income spectrum, a small number of high-income taxpayers pay as much as 31 percent of their benefits in taxes. Thats equal to the top marginal income tax rate of 37 percent applied to 85 percent of their benefits.
On average, beneficiaries pay about 7 percent of their benefits in income taxes. Beneficiaries with incomes below $40,000 owe less than 0.5 percent of their benefits in taxes, CBO estimates. In contrast, beneficiaries with incomes over $100,000 owe about 21 percent .
Is Social Security Taxable
Social Security income is generally taxable at the federal level, though whether or not you have to pay taxes on your Social Security benefits depends on your income level. If you have other sources of retirement income, such as a 401 or a part-time job, then you should expect to pay some income taxes on your Social Security benefits. If you rely exclusively on your Social Security checks, though, you probably wont pay taxes on your benefits. State taxes on Social Security, on the other hand, vary from state to state. Regardless, it can be helpful to work with a financial advisor who can help you understand how different sources of retirement income are taxed.
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No Matter How You File Block Has Your Back
Donate Your Required Minimum Distribution
If you cant wiggle out of taking your RMD from a traditional IRA, then donate it to charity to get into the tax-free zone. The donation could allow you to deduct the amount from your adjusted gross income. But youll have to be eligible for the qualified charitable distribution rule, including being over age 72 and paying the distribution directly from the IRA to the charity.
Thats a strategy that Crane suggests, though he acknowledges that some people will have too much income and simply wont be able to lower their adjusted gross income.
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Dont Forget Social Security Benefits May Be Taxable
Tax Tip 2020-76, June 25, 2020
Taxpayers receiving Social Security benefits may have to pay federal income tax on a portion of those benefits.
Social Security benefits include monthly retirement, survivor and disability benefits. They don’t include supplemental security income payments, which aren’t taxable.
The portion of benefits that are taxable depends on the taxpayer’s income and filing status.
Withdraw Taxable Income Before Retirement
Another way to minimize your taxable income when drawing Social Security is to maximize, or at least increase, your taxable income in the years before you begin to receive benefits.
You could be in your peak earning years between ages 59½ and retirement age. Take a chunk of money out of your retirement account and pay the taxes on it. Then, you can use it later without pushing up your taxable income.
This means you could withdraw funds a little earlyor take distributions, in tax jargonfrom your tax-sheltered retirement accounts, such as IRAs and 401s. You can make penalty-free distributions after age 59½. This means you avoid being dinged for making these withdrawals too early, but you must still pay income tax on the amount you withdraw.
Since the withdrawals are taxable , they must be planned carefully with an eye on the other taxes you will pay that year. The goal is to pay less tax by making more withdrawals during this preSocial Security period than you would after you begin to draw benefits. That requires considering the total tax bite from withdrawals, Social Security benefits, and other sources. Be mindful, too, that at age 72, youre required to take RMDs from these accounts, so you need to plan for those mandatory withdrawals.