Three Ways To Reduce The Taxes That You Pay On Benefits
Is Social Security taxable? For most Americans, it is. That is, a majority of those who receive Social Security benefits pay income tax on up to half or even 85% of that money because their combined income from Social Security and other sources pushes them above the very low thresholds for taxes to kick in.
But there are three strategies you can useplace some retirement income in Roth IRAs, withdraw taxable income before retiring, or purchase an annuity, to limit the amount of tax you pay on Social Security benefits.
Will You Owe Taxes On Your Social Security Benefits
As with most questions about taxes, the answer is “it depends.”
About 40% of people who get benefits pay income taxes on them, according to the Social Security Administration . That’s because their income in retirement exceeds limits set by tax rules and regulations.
Generally, if Social Security is your only retirement income, you won’t have to pay taxes on it. But if you have at least moderate income, you’ll most likely owe the government some money.
The good news is that while up to 85% of your benefits may be taxed at ordinary income rates, it’s never 100%. That’s considered tax-efficient compared with other retirement plans whose distributions may be fully taxable. In addition to the federal tax bite, 13 states also tax Social Security benefits using either the federal provisional income formula or their own.
How Do I Determine If My Social Security Is Taxable
Add up your gross income for the year, including Social Security. If you have little or no income besides your Social Security, you wont owe taxes on it. However, if youre an individual filer with at least $25,000 in gross income, including Social Security for the year, then up to 50% of your Social Security benefits may be taxable. For a couple filing jointly, the minimum is $32,000. If your gross income is $34,000 or more , then up to 85% may be taxable.
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Example Of Social Security Taxation
Let’s say a single, 68-year-old retired woman, Susan, receives a Social Security benefit totaling $18,000 for 2021.
Susan collected $30,000 from other means throughout the year, so her provisional income is $39,000 .
Then, 85% of Susan’s total Social Security benefit, $15,300, is subject to federal income tax.
If you collect Social Security and anticipate you’ll need to pay federal taxes on your benefit, you can make estimated quarterly payments or elect to have federal taxes withheld either 7%, 10%, 12%, or 22% of your monthly benefit. You can also have additional taxes withheld from your other income sources, such as a pension.
Important: The following states also tax federal Social Security benefits, according to AARP: Colorado, Connecticut, Kansas, Minnesota, Missouri, Montana, Nebraska, New Mexico, Rhode Island, Utah, Vermont, and West Virginia.
Social Security benefits for retirees, beneficiaries, and disabled people are considered a form of income by the IRS. But only a portion is subject to taxation 15% of your total benefit for the year is always tax free.
If your income for the year is more than $34,000, or more than $44,000 if you’re married, then you can expect to pay income taxes on most of the benefits you collected.
If you’d prefer to pay taxes as you go to avoid a large bill during tax season, opt in to withholding by filling out the form and returning it to your local Social Security office by mail or in person.
When Is Social Security Income Taxable
To determine when Social Security income is taxable, youll first need to calculate your total income. Generally, the formula for total income for this purpose is: your adjusted gross income, including any nontaxable interest, plus half of your Social Security benefits.
If youre married and filing jointly with your spouse, your combined incomes and social security benefits are used to figure your total income.
Then youll compare your total income with the base amounts for your filing status to find out how much of your Social Security income is taxable, if any.
Youll see that you fall into one of three categories. If your total income is:
- Below the base amount, your Social Security benefits are not taxable.
- Between the base and maximum amount, your Social Security income is taxable up to 50%.
- Above the maximum amount, your Social Security benefits are taxable up to 85%.
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How Are Social Security Payments Taxed
The tax rate for Social Security benefits varies based on a number of factors aside from just age and the household income of recipients is the main deciding factor in taxation. Those thresholds are also dependent on the filing status of Social Security recipients.
Individuals with a Total Gross Income, including Social Security, of more than $25,000 will be taxed on up to 50 percent of their Social Security income. Couples who file jointly will begin being taxed when their total income exceeds $32,000.
Individuals earning more than $34,000, or couples with a combined gross income of at least $44,000, will be taxed on up to 85 percent of their Social Security benefits.
These amounts are not indexed to inflation which means, over time, more and more recipients have had to pay taxes on Social Security benefits. Typically it is only retirees, who have very little household income aside from their Social Security entitlement, who could be exempt from any form of taxation on the payments.
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How To Report Your Social Security Income
Each January, you will receive a Form Social Security 1099, SSA-1099, that shows the total benefits you received for the previous year and the total amount you are required to report to the IRS on your federal tax return.
If you misplaced your form, you can download a copy by creating a free online account with the Social Security Administration.
You will report the amount in Box 5 of Form SSA-1099 and the total amount on line 6a of your Form 1040, U.S. Individual Income Tax Return or Form 1040-SR, U.S. Tax Return for Seniors. The amount considered taxable income depends on what other income you earned during the year, which you should note on line 6b of Form 1040 or Form 1040-SR.
Remember: The taxable amount of your benefits is based on your filing status and combined income. If you need to calculate the taxable amount of Social Security benefits, you can use this worksheet.
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How Can I Avoid Paying Taxes On Social Security
Here’s how to reduce or avoid taxes on your Social Security benefit:
How To Reduce Social Security Taxes
It’s hard to reduce those taxes but it’s not impossible.
If you can lower your adjusted gross income or AGI, you can reduce the amount of tax created on your Social Security benefit, Freitag explains.
There are two common ways to lower your AGI and another, which which is less common:
Taking money from a reverse mortgage, if you have one, is yet another way to create a cash flow that could help reduce how much income tax you might pay on your Social Security benefits.
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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.
Filing Season Reminder: Social Security Benefits May Be Taxable
IRS Tax Tip 2021-66, May 12, 2021
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.
To find out if their benefits are taxable, taxpayers should take 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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Does Social Security Count As Income
Since 1935, the U.S. Social Security Administration has provided benefits to retired or disabled individuals and their family members. … While Social Security benefits are not counted as part of gross income, they are included in combined income, which the IRS uses to determine if benefits are taxable.
California Inflation Relief Payments: When Will I Get My Check
Dan is a writer on CNET’s How-To team. His byline has appeared in Newsweek, NBC News, The New York Times, Architectural Digest, The Daily Mail and elsewhere. He is a crossword junkie and is interested in the intersection of tech and marginalized communities.
California residents have started receiving onetime “Middle Class Tax Refund” payments.
Why it matters
Eligible taxpayers will receive between $200 and $1,050, either through direct deposit or debit cards.
Inflation-relief payments started going out to California taxpayers this month. The Middle Class Tax Refund, as it’s being billed, can be for as much as $1,050, depending on your income, residency, filing status and household size.The payout is part of Gov. Gavin Newsom’s $12 billion relief effort, which he said “prioritizes getting dollars back into the pockets of millions of Californians grappling with global inflation and rising prices.” As of Oct. 20, nearly 3.5 million Californians already received their payments through direct deposit, according to the Franchise Tax Board.
Here’s what you need to know about California’s inflation relief checks, including who’s eligible, how much they can get and how payments are being distributed.
For more on tax relief, find out which other states are issuing tax refunds and pausing their gas tax.
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State Taxation Of Social Security Benefits
In addition to federal taxes, some states tax Social Security benefits, too. The methods and extent to which states tax benefits vary. For example, New Mexico treats Social Security benefits the same way as the federal government. On the other hand, some states tax Social Security benefits only if income exceeds a specified threshold amount. Missouri, for instance, taxes Social Security benefits only if your income is at least $85,000, or $100,000 if you’re married filing a joint return. Utah includes Social Security benefits in taxable income but allows a tax credit for a portion of the benefits subject to tax.
Although you can’t have state taxes withheld from your Social Security benefits, you generally can make estimated state tax payments. Check with the state tax agency where you live for information about the your state’s estimated tax payment rules.
Who Has To Pay Social Security Taxes
If you work as an employee in the United States, your employer will deduct Social Security taxes as part of your payroll. If you are self-employed, you are responsible for remitting your own Social Security taxes. Under both situations, most workers are required to contribute Social Security taxes up to IRS limits.
Under limited circumstances, some individuals may claim a qualifying religious exemption or temporary student exemption. Foreign government employees and nonresident aliens may also not be required to pay Social Security taxes. Last, individuals that don’t make enough money may also not end up paying Social Security.
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Other Taxes Withheld From Your Paycheck
Take a look at your most recent pay stub. You’ll notice that there are other taxes withheld from your paycheck other than the Social Security tax. For example, federal income tax is withheld from your pay, because Uncle Sam like to get his cut a little bit at a time . State income taxes will also be withheld, unless you live in a state without an income tax.
You also have a Medicare tax taken out of your wages. This tax is equal to 1.45% of your pay. Unlike the Social Security tax, there is no cap on wages to which the Medicare tax applies. So, even if you earn more than $160,200 in 2023, you’ll pay the 1.45% Medicare tax on all your wages. In fact, if you make too much money, you have to pay even more in Medicare taxes. That’s because workers must also pay an additional 0.9% Medicare surtax on wages over $200,000 for singles and $250,000 for married couples filing a joint tax return .
What Percentage Of Social Security Is Taxable
If you file as an individual, your Social Security is not taxable if your total income for the year is below $25,000. Half of it is taxable if your income is in the $25,000$34,000 range. If your income is higher, up to 85% of your benefits may be taxable.
If you and your spouse file jointly, youll owe taxes on half of your benefits if your joint income is in the $32,000$44,000 range. If your income exceeds that, then up to 85% is taxable.
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Uncle Sam Can Tax Up To 85% Of Your Social Security Benefits If You Have Other Sources Of Income Such As Earnings From Work Or Withdrawals From Tax
Many people are surprised to learn that Social Security benefits can be taxed. After all, why is the government sending you a payment one day and asking for some of it back the next? But if you take a closer look at how the federal tax on Social Security is calculated, you’ll see that many people actually don’t pay any tax on their Social Security benefits.
There’s no federal income tax on Social Security benefits for most people who only have income from Social Security. Thanks to the highest cost-of-living adjustment in 40 years, the average monthly Social Security check for a retired worker in 2022 is $1,658, which comes to $19,896 per year. That’s well below the minimum amount for taxability at the federal level.
On the other hand, if you do have other taxable income such as from a job, a pension or a traditional IRA then there’s a much better chance that Uncle Sam will take a 50% or 85% bite out of your Social Security check. Plus, depending on where you live, your state might tax a portion of your Social Security benefits, too.
payments sent by the Social Security Administration are not taxable.)
Calculating Fica Taxes: An Example
An employee who makes $165,240 a year collects semi-monthly paychecks of $6,885 before taxes and any retirement-plan withholding. Though Medicare tax is due on the entire salary, only the first $147,000 is subject to the Social Security tax for 2021. Since $147,000 divided by $6,885 is 21.3, this threshold is reached after the 22nd paycheck.
For the first 21 pay periods, therefore, the total FICA tax withholding is equal to + , or $526.70. Only the Medicare HI tax is applicable to the remaining three pay periods, so the withholding is reduced to $6,885 x 1.45%, or $99.83. In total, the employee pays $8,964.27 to Social Security and $2,395.98 to Medicare each year. Though it does not affect the employee’s take-home pay, the employer must contribute the same amount to both programs.
As mentioned above, those who are self-employed are considered both the employer and the employee for tax purposes, meaning they are liable for both contributions. In the example above, a self-employed person with the same salary pays $17,928.54 to Social Security and $4,791.96 to Medicare.
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