Will I have to pay taxes on my Social Security income?

By | September 16, 2023

The simple answer is yes: Social Security income is generally taxable at the federal level, although whether or not you should pay taxes on Social Security benefits depends on your income level. If you have other sources of retirement income, such as a 401(k) or a part-time job, you should expect to pay income taxes on your Social Security benefits. If you rely solely on your Social Security checks, you likely won’t pay taxes on your benefits. State laws vary regarding the taxation of Social Security. Regardless, it’s a good idea to work with a financial advisor to help you understand how different sources of retirement income are taxed.

Is my Social Security income taxable?

According to the IRS, the quick way to see if you’ll pay taxes on your Social Security income is to take half of your Social Security benefits and add that amount to everything else in your income, including tax-free interest. This number is known as your combined income (combined income = adjusted gross income (AGI) + nontaxable interest + half your Social Security benefits).

If your overall income is above a certain limit (the IRS calls this limit the basic amount), you will have to pay at least some taxes.

The limit is $25,000 if you are a single, head of household, or qualifying widow or widower with a dependent child. The limit for joint applicants is $32,000. If you are married, you must file separately, and you will likely have to pay taxes on your Social Security income.

Calculating Social Security Income Tax

If your Social Security income is taxable, the amount of tax you pay will depend on your total combined retirement income. However, you will never pay taxes on more than 85% of your Social Security income. If you file as an individual with a total income of less than $25,000, you won’t have to pay taxes on your Social Security benefits in 2021, according to the Social Security Administration.

For tax year 2021 (which you will file in 2022), single filers with combined income between $25,000 and $34,000 must pay income taxes on up to 50% of their Social Security benefits. If your combined income is more than $34,000, you’ll pay taxes on up to 85% of your Social Security benefits.

For married couples filing jointly, you will pay taxes on up to 50% of your Social Security income if you have a combined income between $32,000 and $44,000. If you have a combined income above $44,000, you can expect to pay taxes on up to 85% of your Social Security benefits.

If 50% of your benefits are taxable, the exact amount you include in your taxable income (i.e. on Form 1040) will be the lesser of a) half your annual Social Security benefits or b) half the difference between your combined income and the IRS base amount.

Let’s look at an example. Let’s say you’re a single person receiving a monthly benefit of $1,543, which is the average benefit after the cost of living increase in January 2021. Your total annual benefits would be $18,516. Half of that would be $9,258. So let’s say you have a combined income of $30,000. The difference between your combined income and the base amount (which is $25,000 for individual applicants) is $5,000. Therefore, the taxable amount to enter on your federal income tax form is $5,000, since it is less than half your annual Social Security benefit.

The example above is for someone who pays taxes on 50% of their Social Security benefits. Things get complicated if you pay taxes on 85% of your benefits. However, the IRS helps taxpayers by offering software and a worksheet to calculate Social Security tax liability.

If you’re ready to be matched with local advisors who can help you reach your financial goals, it begins now.

How to File Social Security Income on Federal Taxes

Once you have calculated your Social Security taxable income amount, you will need to enter that amount on your income tax form. Luckily, this part is easy. First, find the total amount of your benefits. It will be found in box 3 of the SSA-1099 form. Then, on Form 1040, you’ll write the total amount of your Social Security benefits on line 5a and the taxable amount on line 5b.

Please note that if you are filing or amending a tax return for tax year 2017 or earlier, you will need to file Form 1040-A or 1040. The 2017 1040-EZ did not allow you to report Social Security income.

Simplify Social Security taxes

During your working years, your employer likely withheld payroll taxes from your paycheck. If you earn enough in retirement to pay federal income tax, you will also have to withhold taxes on your monthly income.

To withhold taxes on your Social Security benefits, you will need to complete Form W-4V (Application for Voluntary Tax Withholding). The form has only seven lines. You will need to enter your personal information and then choose how much to withhold from your benefits. The only withholding options are 7%, 10%, 12% or 22% of your monthly benefit. After completing the form, mail it to your nearest Social Security Administration (SSA) office or drop it off in person.

If you prefer to pay your withholding taxes more accurately, you can choose to submit estimated tax payments instead of asking the SSA to withhold your taxes. Estimated payments are tax payments made each quarter on income on which an employer is not required to withhold tax. So, if you’ve ever earned self-employment income, you may already be familiar with estimated payments.

In general, it is easier for retirees to have the SSA withhold taxes. Estimated taxes are a little more complicated and will simply require you to work harder throughout the year. However, you should make the decision based on your personal situation. You can also change your strategy at any time by asking the SSA to stop withholding taxes.

The impact of Roth IRAs

If you’re worried about your income tax burden in retirement, consider saving in a Roth IRA. With a Roth IRA, you save after-tax dollars. Because you pay taxes on the money before you contribute it to your Roth IRA, you won’t pay any taxes when you withdraw your contributions. Additionally, you do not need to withdraw funds on a specific schedule after retirement. This differs from traditional IRAs and 401(k) plans, which require you to start withdrawing money once you reach age 72, or 70.5 if you were born before July 1, 1949.

Therefore, when you calculate your combined income for Social Security tax purposes, your withdrawals from a Roth IRA will not be counted as part of that income. This could make a Roth IRA a great way to increase retirement income without raising taxes in retirement.

Another thing to note is that many pension plans allow people age 50 and older to make annual catch-up contributions. You can make catch-up contributions of up to $1,000. These must be done by the tax return due date. You have until April 15, 2022 to apply the $1,000 catch-up contribution to your 2021 Roth IRA contribution total.

State taxes on Social Security benefits

Everything we discussed above pertains to federal income taxes. Depending on where you live, you may also have to pay state income taxes.

There are 12 states that levy taxes on at least some portion of your Social Security income. Two of these states (Minnesota and Utah) follow the same tax rules as the federal government. Therefore, if you live in one of these two states, you will pay regular state income tax rates on all of your taxable benefits (i.e., up to 85% of your benefits).

Other states also follow federal rules but offer deductions or exemptions based on age or income. So in these nine states, you probably won’t pay taxes on your entire taxable amount.

The other 38 states (plus Washington, D.C.) do not tax Social Security income.

State taxes on Social Security benefits

Taxed according to federal rules: Minnesota, Utah

Partial taxation (exemptions based on income and age): Colorado, Connecticut, Kansas, Missouri, Montana, Nebraska, New Mexico, Rhode Island, Vermont, West Virginia

No state tax on Social Security benefits: Alabama, Alaska, Arizona, Arkansas, California, Delaware, District of Columbia, Florida, Georgia, Hawaii, Idaho, Illinois, Indiana, Iowa, Kentucky, Louisiana, Maine, Maryland, Massachusetts, Michigan, Mississippi, Nevada, New Hampshire, New Jersey, New York, North Carolina, North Dakota, Ohio, Oklahoma, Oregon, Pennsylvania, South Carolina, South Dakota, Tennessee, Texas, Virginia, Washington, Wisconsin, Wyoming

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Bottom line

We all want to pay as little tax as possible. This is especially true in retirement, when most of us have a certain amount of savings. But consider that if you have enough retirement income to pay taxes on your Social Security benefits, you’re probably in decent financial shape. It means you have income from other sources and are not entirely dependent on Social Security to cover living expenses.

You can also save on taxes in retirement simply by having a plan. Help yourself prepare for retirement by working with a financial advisor to create a financial plan.

Tips for saving taxes in retirement

  • Financial advisors can offer valuable guidance and detailed information about retirement taxes. Finding a qualified financial advisor doesn’t have to be difficult. Finding a qualified financial advisor doesn’t have to be difficult. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisors at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you reach your financial goals, start now.

  • What you pay in taxes during retirement will depend on how pension-friendly your state is. So, if you want to reduce your tax impact, consider moving to a state with fewer taxes that hit retirees.

  • Another way to save for retirement is to downsize your home. Moving to a smaller home could reduce your property taxes and other housing costs as well.

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