Health & Fitness

Your Social Security May Be Taxable. Here’s What You Need To Know – Forbes Advisor

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Because you spend your whole working life paying taxes to Social Security, you may hope to avoid a tax bill when you finally retire.

But more than half of Americans who receive Social Security benefits owe taxes on that income come tax day. Here’s how the IRS taxes Social Security—and how you can shrink that number.

How the IRS Taxes Social Security

Despite popular belief that you age out of taxes when you reach a certain age, your Social Security benefits remain taxable as long as you live. The amount of taxes you may owe on those benefits depends on the other income you receive this year. This may come in the form of wages, self-employment income, investment income and other taxable income.

Up to 85% of your Social Security benefits may be subject to taxes at your ordinary income tax rate, but 44% of people won’t owe any income taxes on their Social Security benefits.

Those with little or no additional income outside of Social Security benefits typically will not have to pay any taxes on benefits. In addition, those who only receive payment from Social Security benefits may not be required to file a tax return at all.

To figure out how much you may owe, you’ll need your filing status and combined income. The combined income formula can get a little complex, but you can calculate it by adding your adjusted gross income and any nontaxable interest you’ve earned this year to one half of your Social Security benefits.

Once you’ve calculated your combined income, use this table to determine how much of your benefits may be taxed at your ordinary income tax rate.

Filing Status  Up to 50% is taxable Up to 85% is taxable
Single or Head of Household If your combined income is between $25,000 and $34,000. If your combined income is more than $34,000.
Married Filing Jointly If you and your spouse have combined income between $32,000 and $44,000. If you and your spouse have a combined income of more than $44,000.

Note: If you are married and filing separately, up to 85% of your Social Security benefits are taxable if your combined income is at least $0.

Which States Tax Social Security?

Some states also tax your Social Security benefits (so you may pay federal AND state taxes on your benefits). Currently, there are 13 states that tax some or all of the benefits you receive.

State  Taxability
Colorado
  • Some or all benefits may be taxable.
  • Those 55 years of age or older are exempt from taxation.
Connecticut
  • Up to 50% of Social Security benefits are taxable.
Kansas

 

  • Benefits are only taxable if AGI exceeds $75,000 and they are taxable to the federal government.
Minnesota
  • Some or all benefits may be taxable based on income level.
Missouri

 

  • A portion may be taxable if your AGI exceeds $100,000 for married couples ($85,000 for single filers) and you are under 62 years of age and not disabled.
Montana
  • Some Social Security benefits may be taxable; the state advises taxpayers to complete a worksheet to determine how much of their benefits may be taxed.
Nebraska
  • Only taxable to those whose income is above $59,100 for married couples and $44,460 for single filers. Beginning in 2030, the state will exempt Social Security from taxation if approved by the state legislature.
New Mexico
  • Only taxable income to those whose income is above $32,000 for married couples ($25,000 for single filers); however, those who are 65 and older and whose AGI is less than $51,000 ($28,500 for single filers) can exempt $8,000 from their income.
North Dakota
  • North Dakota follows the same rules as the federal government to determine whether Social Security benefits are taxable.
Rhode Island
  • Only taxable if you have not reached full federal retirement age and your AGI is above $107,950 for married filers ($86,350 for single filers).
Utah
  • Only taxable if your income exceeds $50,000 for married couples ($35,000 for single filers).
Vermont
  • Your Social Security benefits are taxable based on your filing status and AGI.
  • Married filers with an AGI of less than $60,000 may qualify for a full exemption ($45,000 for single filers).
  • Married filers with an AGI between $60,001 and $69,999 qualify for a partial exemption ($45,001 and $54,999 for single filers.
  • The state advises taxpayers to complete a worksheet to determine how much of their benefits may be taxed.
West Virginia
  • At least partially taxable for those making $100,000 or more ($50,000 if single), however tax-free for those under those limits. Starting in 2022 Social Security benefits will be tax free

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.

How to Pay Taxes on Social Security

If you owe taxes on your Social Security income, you can pay them in a few ways. First, you can pay them each Tax Day, just as you paid taxes when you were younger. You may also consider paying estimated taxes quarterly if you expect you may owe taxes.

Alternatively, if you expect your Social Security benefits to be taxable, you may want to withhold federal taxes from your payments, just like you did from your paycheck when you were working.

You can do so by completing Form W-4V, Voluntary Withholding Request, and sending it to your Social Security office. You can elect to have 7%, 10%, 12% or 22%withheld from your payments.

How to Reduce Your Social Security Tax Liability

If you expect you may owe taxes on your Social Security benefits, there are a few things you can do to potentially minimize them.

  • Reduce business profits: If you own a business, you can reduce your tax liability by taking advantage of business tax write-offs you may be entitled to.
  • Limit retirement withdrawals: You may also want to consider reducing your withdrawals from retirement income to reduce your tax liability, but you should consider the required minimum distribution (RMD) rules while doing so. If you don’t withdraw at least a minimum from most taxable retirement accounts after age 72, you may actually increase your tax burden.
  • Sell capital assets strategically: If you own capital assets, such as stocks, bonds or real estate, you should discuss with a tax professional the best time to sell your assets. Any capital assets sold at a loss can reduce your overall income. Any assets sold at a gain may be subject to capital gains taxes, depending on how long you held them.

 

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