Did you know that you may be taxed on your Social Security income?
You might assume that since you’ve been putting money into Social Security over the course of your career, that the money you take out at retirement is free from taxes. Unfortunately, this isn’t necessarily the case.
If you thought it was possible that Social Security income might be taxable, give yourself a pat on the back. Your suspicions are justified.
In fact, according to a publication from the Social Security Administration, approximately one-third of Social Security income recipients have to pay income taxes on their Social Security income. Are you in this group? I’ll show you how to find out.
There are many reasons to love Social Security, and even though the taxability of Social Security income isn’t one of them, it’s worth understanding how Social Security income is taxed so you can pay your dues.
Let’s take a look at the taxability of Social Security income at the federal level and the state level. After that, I’ll dive into a few practical ways you can help ensure you’re correctly paying taxes on your Social Security income. Finally, we’ll look at some important further considerations in retirement.
Taxability at the Federal Level
You can read about federal income taxes and your Social Security benefits from the Social Security Administration’s website, but I’ll break down the general rules for you below.
Social Security may or may not be taxed at the federal level. It depends on your income.
Typically, you’re going to pay taxes on your Social Security income if you have a great deal of income other than from your Social Security benefits. This may include income such as:
- Employment wages
- Self-employment income
Keep in mind that there are other types of taxable income too, and they would have to be figured into the equation.
If you file as an individual and your 2015 combined income (your adjusted gross income + non-taxable interest + the appropriate percentage of your Social Security benefits) is between $25,000 and $34,000, you may have to pay income tax on up to 50% of your benefits. If your 2015 combined income is more than $34,000, you may have to pay income tax on up to 85% of your benefits.
Note: If you’re feeling slightly overwhelmed by this math, don’t worry, we’ll get to some practical steps to ensure you’re correctly paying taxes on your Social Security income a little later in the article.
Now, if you file a joint return and you and your spouse have a 2015 combined income (see definition above) that is between $32,000 and $44,000, you may have to pay income tax on up to 50% of your benefits. If your 2015 combined income is more than $44,000, you may have to pay income tax on up to 85% of your benefits.
You may have noticed that the word “may” has been used a lot here. Don’t worry, there are ways to accurately calculate the taxability of your Social Security income – I’ll explain how in a moment.
Taxability at the State Level
Okay, now that we have an overview of the taxability of Social Security income at the federal level, let’s take a look at what happens at the state level.
As you may have guessed, methods vary how each state taxes its Social Security income. Some states tax just like the federal government, others have exceptions, and others don’t tax Social Security income at all.
One of the best ways to find out how your state taxes Social Security income is to contact the state government itself. Keep in mind that the way your state taxes Social Security income may change with time, so it’s best to stay up-to-date every year with the latest tax policy.
How to Ensure You’re Paying the Right Amount
If you’re thoroughly overwhelmed by the amount of research you feel is needed to correctly pay your Social Security income taxes on the federal and state levels, take heart. There’s good news . . . .
At the end of each year, if you’re receiving Social Security income, you’ll receive Form SSA-1099. This is the Social Security Benefit Statement. This statement will show the amount of benefits you received in the previous year. There are two ways you can go about using this statement . . . .
One way is to use it yourself to complete your federal income tax return and find out if you owe taxes on your Social Security income – you can do the same for your state income tax return if applicable. Another way is to hand your SSA-1099 to a tax professional who can help you determine the taxability of your Social Security income at the federal and state levels. The choice is yours.
If you do find that you owe taxes on your Social Security income, there are two ways that you can pay these taxes at the federal level. One way is to make quarterly payments to the Internal Revenue Service. The other way – that would cut down on the paperwork – is to choose to have federal taxes withheld from your Social Security benefits.
Further Considerations in Retirement
Even if you find that you’re in a state that doesn’t tax Social Security income, that alone doesn’t mean your state is the best one for a healthy retirement. Retirees may pay taxes in a number of ways, including through sales tax and property taxes.
If you’re a retiree or near retirement, it may be best to hire a financial professional who can help you determine the tax implications of living in a particular state and for information concerning your individual situation. You may find it beneficial to move to another state – hopefully near friends and family. Every tax is important to consider in retirement.
By paying attention to Social Security income taxes and the other factors that affect retirement, you can create a financial plan designed to last.
Tax services are not offered through, or supervised by, Capital Analysts or Lincoln Investment. This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.
Daniel Zajac, CFP®, AIF®, CLU®, is a Partner and Financial Advisor with Simone Zajac Wealth Management Group based in the Philadelphia, PA area. As a 33-year-old veteran of the financial planning industry, Daniel loves to share his financial expertise with the masses at FinanceandFlipFlops.com. There, he explores the ins and outs of topics such as life insurance, investing, retirement planning, and much more.
This material was prepared by Daniel Zajac, who is unaffiliated with LPL Financial.