Posted by Fred Lake

Yes, Social Security Is Subject To Tax but How?

Yes, Social Security Is Subject To Tax but How?

Is social security taxable? The most straightforward answer is yes, social security is subject to tax. The obligation or payment of other taxes on social security benefits depends on the level of income. If you have other means of retirement income, such as 401(k) or a part-time job, you must pay taxes on social security benefits. If you rely solely on social security checks, it is unlikely that you will pay taxes on your benefits.

According to the IRS, the fastest way to find out if you will be paying taxes on your social security income is to take half of your social security benefits and add it to all other income, including income tax, without interest. This figure is called combined income (combined income = adjusted gross income + non-taxable interest + half social security benefits).

If the total income betters a certain threshold (the IRS calls this a threshold value), at least one tax must be paid.

The threshold is $25,000 if you are single, qualified breadwinner, widow, or widower with a dependent child. The limit for joint filing is $32,000. If you are married and make a separate statement, you may have to pay taxes on social security income.

Calculation of social insurance income tax

If social security income is taxable, the amount to be paid according to taxes will depend on the total pension income. 

For the fiscal year 2019, taxpayers with combined incomes between $25,000 and $34,000 must pay income taxes representing up to 50% of their social security benefits. If the combined income exceeds $34,000, you will pay taxes up to 85% of your social security benefits.

For couples who have a joint return, they will have to pay taxes of up to 50% of their retirement income if they have a combined income of between $32,000 and $44,000. If you have combined income greater than $44,000, you can expect to pay up to 85% of taxes on social security benefits.

If 50% of the benefits are taxable, the exact amount to be included in taxable income (or in Form 1040) will be less than 

  • Half of the annual social security benefits or
  • Half the difference in revenue and the underlying value of the IRS.

Let's take a look at an example. Suppose you are a single applicant who receives a monthly benefit of $1,410 (average gain in December 2018). Your total annual profits would be $16,920. Half of that would be $8,460. So, let's say you have a combined income of $30,000. The difference between the combined income and the necessary amount (which is $25,000 for individual taxpayers) is $5,000. As a result, the tax base that you will include in your federal income tax form is $5,000 because it represents less than half of your annual social security benefit.

The above example is for someone who pays taxes, with 50% of social security benefits. Things get complicated if you pay taxes on 85% of your benefits. However, the IRS helps taxpayers by providing software and a spreadsheet to calculate tax obligations for social security.

How to Report Social Security Income in Federal Taxes

After calculating the amount of taxable social security income, this amount must be entered on the income tax form. Fortunately, this part is natural.

First, find the total value of your benefits in box 3 of the SSA-1099 form. Then, on Form 1040, you will enter the total amount of social security interests on line 5a and the taxable value on line 5b.

Please note that if you file or change a tax return for a fiscal year prior to 2017 or earlier, you must file it on Form 1040-A or Form 1040. 2017 1040-EZ does not allow you to report Social security income.

Simplification of taxes on social security

During your years of work, your employer probably withheld taxes on wages. If you earn enough to pay the federal income tax, you must also withhold the monthly income tax.

In order to withhold taxes on social security benefits, you must complete Form W-4V (Request for Voluntary Withholding Request). The form has only seven lines. You must enter your personal information and choose the amount to retain your benefits. The only possible conservation options are 7%, 10%, 12%, or 22% of the monthly allowance. After filing the form, send it to the nearest Social Security Administration (SSA) or leave it in person.

If you prefer to pay for more withholding payments, you can choose to send estimated tax payments instead of having SSA tax deductions. The estimated payments are the quarterly income tax payments for which the employer is not required to withhold taxes. Therefore, if you have already earned income from self-employment, you must already know the estimated payments.

In general, it is easier to withhold taxes for SSA retirees. The estimated taxes are a bit more complicated and will require more work throughout the year. However, you must make a decision based on your personal situation. You can also change the strategy at any time by asking the SSA to terminate the withholding tax.

Impact of Roth IRA accounts

If you are worried about your tax burden on retirement income, consider saving on a Roth IRA. With a Roth IRA, you save money after tax. When you pay taxes on the funds before contributing to the Roth IRA, you do not pay taxes on withdrawing contributions. In addition, it is not necessary to withdraw funds at a specific time after retirement. This differs from traditional IRAs accounts and 401(k) plans, which require you to start removing your money after reaching age 70.5 years.

Therefore, when computing combined income for Social Security tax purposes, withdrawals from a Roth IRA account are not considered part of this income. This could make an IRA Roth account a great way to increase your retirement income without raising your taxes.

State taxes on social security benefits

All we discussed above is your federal taxes. Depending on your location, you may also have to pay income tax.

There are 13 states that levy taxes on at least a portion of social security income. Four of these states ( North Dakota, Minnesota, West Virginia, or Vermont) follow the same tax rules as the federal government. If you reside in any of the above-listed states, you will pay regular tax rates for all your taxable benefits (up to 85% of your total profits).

The other nine states also comply with the federal rules but offer deductions or exemptions based on age or income. Therefore, in these nine states, you are unlikely not to pay taxes on the full taxable amount.

The other 37 states do not tax social security income.

Conclusion

We all want to pay the least amount of taxes possible. This is true in the case of retirement when most of us have a fixed amount of savings. But have it in mind that if you have enough retirement income to pay taxes on social security benefits, you will probably have a unique financial situation. This means that you have income from other sources and that you do not rely entirely on Social Security to meet your living expenditures.

You can also save your taxes by merely having a plan. Prepare for retirement by working with a financial advisor to create a financial plan.

Fred Lake
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