It used to be so simple: Social Security benefits were tax-free. Period. But then, as part of a \”Save Social Security\” plan, Congress decided to tax up to 50% of benefits. Later, lawmakers decided to tax up to 85%, with the extra revenue going to shore up Medicare. See Also: So, who gets taxed and who doesnБt? First the good news: About 70% of all beneficiaries are still safe. YouБre among the 18 million or so who arenБt so lucky, though, if your Бprovisional incomeБ is more than $25,000 on a single return or $32,000 on a joint return. Provisional income is adjusted gross income (not including Social Security) plus 50% of your benefits plus any tax-free interest from municipal bonds. If that income is between $25,000 and $34,00 on a single return or between $32,000 and $44,000 on a joint return, up to 50% of your benefits can be taxed. The rest is tax-free. Now, if your provisional income is more than $34,000 on a single return or $44,000 on a joint return, itБs likely that 85% of your benefits will be taxed. If you use tax software, it will automatically determine the correct amount. Otherwise, use the IRSБs 18-line worksheet to pinpoint exactly how much is taxed and how much is tax-free. Finally, donБt assume that your state taxes the same amount of benefits as Uncle Sam. In most states, Social Security is still completely tax-free. Take a look at our
to learn more about how you will be taxed during retirement based on where you live. See Also: If you receive Social Security, you may pay income taxes on up to 85% of your Social Security benefits.
This rule about the taxation of benefits is different than the earned income rule, which applies if you receive benefits before your full retirement age, continue to work and earn amounts in excess of the. The formula that determines the taxation of benefits applies to everyone, regardless of age. If you look at a 1040 tax form you will see two boxes; box 20a for total Social Security benefits, and box 20b, for the taxable amount. Here s how the taxable amount is determined. Do you have income in addition to Social Security? Additional sources of income that would show up on your tax return include items such as: Investment income from interest, dividends and capital gains Social Security defines your combined income as the total of yourP Pplus interest, plus one-half of your Social Security benefits. Roth IRA withdrawals do not count as combined income, butP Pinterest does. Your combined income is compared to the threshold amounts in the table below. P If your combined income is less than $25,000 for single filers or less than $34,000 for married filers, then your Social Security benefits will not be taxable for that calendar year. If your combined income exceeds the first threshold amount, then a more complex formula is used to determine what portion of your benefits will be taxable (up to a maximum of 85%). If your combined income exceeds the threshold amounts, an IRS formula is applied to determine how much of your benefits are taxable. The result of these calculations will be that you pay taxes on the lower of: 50% of the amount of combined income over the first threshold amount, plus 35% of the amount of combined income over the second threshold amount You can work through the numbers yourself using the.
You can also usePa free online calculator called Pto come up with a rough estimate of the dollar amount of benefit that would need to go into box 20b (the taxable amount box) on your 1040 tax form. Lets look at an example for a couple, both age 67, who are married and file jointly. One is collecting a. They are both waiting until age 70 to claim their full retirement benefit amounts so they can get the most possible. While delaying, they are taking large IRA withdrawals. Heres a snapshot of their income sources. $10,000 gross Social Security income $50,000 IRA withdrawalP Based on step number one above this makes their combined income $55,000 (which is in excess of the highest threshold amount for marrieds). PUsing the free Social Security taxation calculator in step two above, 85% of their Social Security will be taxed, or $8,500 that will be input to box 20b. PThey do not itemize deductions but instead use the standard deduction and exemptions. Their adjusted gross income (AGI) is $58,500 Taxable income is $35,400 Total tax due is $4,388 After tax funds available to spend $55,612 Now lets look at this same couple three years later. Both are age 70 and receiving their full Social Security amounts. Heres a snapshot of their income sources. $40,000 gross Social Security income $20,000 IRA withdrawal Their combined income is $40,000 (which is between the threshold amounts for marrieds). PUsing the free online Social Security calculator, 10% of their Social Security will be taxed, or $4,000 to be input to box 20b.
PThey do not itemize deductions but instead use the standard deduction and exemptions. Their AGI is $24,000 After tax funds available to spend $59,910 In both years the couple has $60,000 of gross income. However, after they are both 70, because a larger proportion of their income comes from Social Security their tax liability goes down, and they now have more funds to spend. Because of this taxation formula, a couple in the 15% bracket can find they pay tax at a much higher marginal rate. P Up to 85% of yourPSocial SecurityPbenefits received can be taxed, but never 100%. It means that after taxes, a dollar of Social Security income is worth more than a dollar of IRA withdrawals. If you design a retirement income plan that takes advantage of this tax arbitrage, it can make a big difference over the course of your retirement years. You can pay less in tax, and have more to spend. There are many ways you can plan to reduce taxes when you begin withdrawing money. The most common strategy is to delay the start of your Social Security benefits to age 70 while taking IRA withdrawals or using in your 60 s. It isn t the best option for everyone, but for many families, this approach results in less total taxes during their retirement years. Much of this planning has to do with how other sources of income affect how much of your Social Security benefits will be taxable. By planning out the timing of those other sources of income, many can lower their tax bill.