While most people assume that Social Security is tax-free income, this is not always the case. Here, the Social Security experts at Disability Associates discuss the payment of taxes on Social Security benefits.
If you are earning a substantial amount of income aside from your Social Security benefits during retirement, you may owe taxes on up to 85% of your Social Security. This depends on several factors, including your filing status, the types of income you bring in, and whether you exceed the base, non-taxable income level.
The “equation” that determines your income is as follows: adjusted gross income, combined with nontaxable interest and half of your Social Security benefits, equals your combined income.
Adjusted gross income equals your income minus specific deductions, and nontaxable interest is any interest from tax exempt mutual bond funds or municipal bonds.
This combined income determines whether you must pay taxes on your Social Security benefits. For those who are married filing jointly, you do not have to pay taxes if collectively, your combined income does not exceed $32,000. From $32-44,000, you must pay taxes on up to 50% of your Social Security benefits; above $44,000, you must pay taxes on up to eighty-five percent.
For those who are single, the equation stays the same, however, your income cannot exceed $25,000 before you must begin paying taxes: from $25-34,000, you will pay up to 50% taxes, above $34,000, up to eighty-five percent.
If you are required to pay taxes, you have a few options: either pay them in the regular fashion, pay them in advance quarterly, as you would if you were self-employed or have federal income tax taken from your Social Security checks automatically. If you choose to pay quarterly, your tax payments are estimated: if you estimate over what you owe, the IRS will return the balance to you, if you under-estimate what you owe, you will be given a period of time to pay the remaining tax balance.
If you wish to avoid paying taxes, it may be wise to do a cost-benefit analysis of any additional income you bring in over Social Security benefits, for some, taking less income may be equivalent or greater than taking a larger income and paying taxes.
Additionally, there are instances where you can minimize or eliminate Social Security taxes, and the IRS’ Publication 915 details these instances. Using this valuable resource can help you determine whether your situation applies, and how to file accordingly. The extra paperwork and time can mean a sizable tax break, so be sure to take advantage.
Social Security taxes are relatively straight-forward, and should not be feared. For questions specifically regarding the taxation of your income, please reach out to your trusted tax advisor. For more information or assistance with your Social Security benefits, contact the experienced attorneys at Disability Associates today.