Is Social Security Income Taxable?
February 18, 2019 in IRS Info, Tax Planning
A commonly asked question about taxes is whether or not Social Security income is taxable. The short answer is that, unfortunately, yes it is. However, not everyone has to pay taxes on their Social Security income. Whether or not you pay taxes on social security income depends on your income. Let’s take a closer look at the income requirements for Social Security taxes and how much different income brackets end up paying.
When You Don’t Have to Pay Social Security Income Tax
If you rely solely on your Social Security income, you probably won’t have to pay taxes on it. And if you have other income but your overall income is low, you may also not have to pay taxes on your Social Security income.
The IRS has provided a simple way to calculate whether or not you need to pay income tax on your Social Security income. You take one half of your Social Security benefit amount and add that amount to all your other income (including tax-exempt interest). The number you end up with is called your combined income. For single filers, if your combined income is under $25,000, you don’t have pay income tax on your Social Security income. For joint filers, your combined income must be under $32,000 to avoid paying income tax on your Social Security.
When You Do Have to Pay Social Security Income Tax
If by the same calculation we mention above, your income is above $25,000 (for single filers) or $32,000 (for joint filers), you will have to pay some income tax on your Social Security income.
There are two tax brackets to consider for Social Security income tax, the 50% taxable and the 85% taxable brackets. For single filers, if you have a combined income of $25,000 to $34,000, you fall in the 50% taxable bracket. The same goes for joint filers with a combined income of $32,000 to $44,000. Single filers who have a combined income of $34,000 or more fall into the 85% bracket. And the same goes for joint filers with a combined income of $44,000.
These brackets mean that you can either be taxed on up to 50% or up to 85% of your Social Security income. Though, you may end up being taxed on less than the maximum percentage. If you can be taxed on up to 50%, you will pay taxes on the lesser amount of either half of your Social Security benefits or half of the difference between your combined income and the IRS base amount. If you can be taxed on up to 85%, exactly what you’ll be taxed on can be a bit more complicated. However, the IRS has a worksheet on their website that can help you figure out what you would owe taxes on.
Social Security Income Tax and State Taxes
So far in this post, we’ve been talking about federal taxes on Social Security income. However, 13 states also have income taxes on Social Security income. Four states (Minnesota, North Dakota, Vermont, and West Virginia) tax based on the same rules as the federal government. Nine other states (Colorado, Connecticut, Kansas, Missouri, Montana, Nebraska, New Mexico, Rhode Island, and Utah) also tax based on the federal tax rules but offer some unique deductions based on each taxpayer’s income and age. So, depending on your state, you may have to pay taxes on your Social Security income to both the federal and state government.
Tips on Social Security Taxes: Planning for Retirement and Taxes After Retirement
No one wants to pay more in taxes than they absolutely have to. But, luckily, there are a number of things you can do when planning for retirement that can help you owe less in the future. Here are some tips on how you can save on taxes in retirement:
Save for retirement in a Roth IRA, which is taxed upfront and therefore isn’t considered taxable income upon withdrawal.
Plan to move to a state that’s more retirement friendly (especially if you currently live in a state that has state taxes on Social Security income).
Consider downsizing your home upon retirement to lower your property taxes.
Work with a financial advisor to create a financial plan for your retirement. A professional financial advisor can help you explore all your options for retirement to help you be in the best financial shape possible.