Your Social Security income could be taxed. That may seem unfair, but it is possible, depending upon your income.
Social Security benefits became taxable above certain yearly income thresholds in 1984. These income thresholds have been left at the same levels for 32 years, exposing many more people to the tax over time.
Only part of your Social Security income may be taxable. Social Security defines your combined income as the sum of your adjusted gross income, any non-taxable interest earned, and 50% of your Social Security benefit income.
Single filers with a combined income from $25,000-$34,000 and joint filers with combined incomes from $32,000-$44,000 may have up to 50% of their Social Security benefits taxed.2
Single filers whose combined income tops $34,000 and joint filers with combined incomes above $44,000 may see up to 85% of their Social Security benefits taxed.2
What if you are married and file separately? No income threshold applies. Your benefits will likely be taxed no matter how much you earn or how much Social Security you receive.2
You may be able to estimate these taxes in advance. You can use an online calculator , or the worksheet in IRS Publication 915.2 You can have these taxes withheld from your Social Security income, or make estimated tax payments per quarter.
Did you know that 13 states also tax Social Security payments? North Dakota, Minnesota, West Virginia, and Vermont use the exact same formula as the federal government to calculate the degree to which your Social Security benefits may be taxable. Nine other states use more lenient formulas: Colorado, Connecticut, Kansas, Missouri, Montana, Nebraska, New Mexico, North Dakota, Rhode Island, and Utah.2
What can you do if it appears your benefits will be taxed? If your combined income is far greater than the threshold for your filing status, your chances of averting tax on Social Security income are slim. If your combined income is reasonably near the respective upper threshold, some moves might help:
- Revise your portfolio, so that less income and tax-exempt interest are produced annually.
- Make a charitable IRA gift.
- Withdraw more non-taxable retirement income from Roth accounts (assuming you meet the rules)
We can help you investigate your options for potentially reducing taxes on your Social Security income. Call Nicole Albrecht at 951-719-1515 or email her at firstname.lastname@example.org
1 – ssa.gov/policy/docs/issuepapers/ip2015-02.html [12/15]
2 – fool.com/retirement/general/2016/04/30/is-social-security-taxable.aspx [4/30/16]
3 – kiplinger.com/article/retirement/T051-C001-S003-how-to-limit-taxes-on-social-security-benefits.html [7/16]
4 – irs.gov/retirement-plans/retirement-plans-faqs-on-designated-roth-accounts [1/26/16]