Retirees receiving Social Security benefits may have to pay taxes on the part of the benefits. The IRS rules on Social Security can be confusing, though.
You may have to pay taxes on up to 85% of your benefits if your income for the tax year exceeds a specific threshold. Here’s a brief guide from financial advisor D. Paterson Cope on calculating the taxes owed.
Calculating Your Social Security Benefit Taxes
The taxes paid on Social Security benefits depend on the retiree’s income level, and filing status. 50% to 85% of your Social Security benefits are taxable if your “total income” exceeds the specified amount.
Retires with total income below the specified base income are not subject to these taxes. The IRS provides a simple rule of thumb procedure to determine the potential tax liability.
Start by taking half of your Social Security payments and add the figure to the other income streams. Other sources of income include:
- Interest income
- Dividend income
- Rental income
- Capital gains
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The value obtained represents the “total income” (total income = half the Social Security benefits + adjusted gross income + nontaxable interest). The total income limit for a single filer, head of household, or qualifying widow/widower with a dependent child is $25,000. Married retirees filing jointly have a limit of $32,000.
If you are single and have an annual income of between $25,000 and $34,000, 50% of your Social Security benefits could be subject to federal taxes. If you’re married (for those who file jointly) and have an annual income of between $32,000 and $44,000, you may have to pay taxes on 50% of your benefits.
Married taxpayers filing separately and living separately for the tax year are only subject to the 50% Social Security benefits tax if their total income is between $25,000 and $34,000.
Taxpayers filing singly, head of households, qualifying widows, or widowers with a total income of more than $34,000 could be liable to pay federal taxes on 85% of their benefits.
The same applies to married retirees filing singly. Married taxpayers filing jointly and earning more than $44,000 total income are also subject to taxes on 85% of their benefits.
State Taxes on Social Security Benefits
D. Paterson Cope explains depending on your state; you may have to pay state taxes on Social Security benefits.
Twelve states collect taxes on a portion of the Social Security benefits. The percentages vary depending on the local ordinances and may be subject to certain exemptions, Minnesota and Utah taxes according to the federal rules. The other thirty-eight states have no state tax on social benefits.
Are Social Security Benefits Taxable?
The federal government and some states may levy taxes on your Social Security benefits, but that has nothing to do with what you pay into the system. It’s all about how much other income you have and whether you file as an individual or jointly with a spouse.
A financial advisor can provide valuable guidance on your taxes as a retiree, including those on your Social Security benefits.
Who Is D. Paterson Cope?
D. Paterson Cope is CEO and founder of Cope Private Wealth, a comprehensive financial planning company based out of Birmingham, Alabama. Cope Private Wealth specializes in helping retirees and near-retirees to plan out the rest of their lives in comfort and security.
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