You are nearing the time of your retirement and trying to determine what your assets and income would be. Some people may have a pension, a 401k, savings and annuities to supplement their income.
For most people, a major portion of that retirement income will come from Social Security. The question you need to be answered in order to determine your retirement income is:
Is Social Security Taxable?
This question does not have a simple answer on either the federal or state level. There was a time when the easy answer would be “no”. However, that is no longer true.
Ever since Congress passed the “Save Social Security” legislation, there is a tax on Social Security for some people. In the initial legislation, the tax could be on as much as 50% of your Social Security benefits. At a later time, in an effort to beef up Medicare, it was raised to taxing 85% of your Social Security benefits.
Yet not everyone will pay this or any other percentage of tax on their benefits. It depends on your gross income. In order for your benefits to be taxable, you must have a lot of income in addition to your Social Security. This income might be from a 401k or self-employment, wages or dividends, and interest.
If SS (Social Security) or SSDI (Social Security Disability Insurance) is your only retirement income you will not pay taxes on it. However, if the combination of your benefits with any other income puts you over the base amount allowed by the SSA, you will have to pay.
How to Calculate your Taxes on Social Security Income
If you are single or head of household, you don’t pay taxes on the first $25,000 in income per year. However, if your income surpasses $24,999.99 you will pay taxes on anywhere from 50%-85% of your benefit. Between $25,000 and $34,000 you will pay 50%. Over $34,000 and you will pay 85%.
If you are married and your joint income exceeds $32,000 you will have to pay taxes on your benefits. Again, the percentage of your benefits that are taxed depends on your joint income. Between $25,000 and $34,000 you pay taxes on 50% and if your joint income is over $34,000 you will pay taxes on 85% of your benefits
It doesn’t have to be difficult to calculate what you might owe in taxes on your Social Security benefits. There are formula sheets you can use to get exact amounts; however, the Internal Revenue Service says you can quickly determine if you owe taxes on your benefits by adding ½ of your Social Security benefits to the total of your other income. Your other income would also include any earned interest that is tax exempt.
This total is what the IRS calls your combined income. The formula is ½ Social Security benefits + adjusted gross income + nontaxable income = Combined Income. This combined sum is the income amount that determines if, and how much, Federal tax on Social Security benefits you owe.
It is easier to determine this if you have to pay taxes on 50% of your benefits. It gets more complicated when you have to pay them on 85% of your benefits. The IRS does provide a worksheet to calculate what you owe or software to calculate it for you.
When you receive your Social Security Benefit Statement (Form SSA-1099) each January, you will know the amount of your Social Security benefits from the prior year. Use this amount in the Combined Income formula. Add it to your adjusted gross income and non-taxable interest. If this total is more than $25,000 for a single person or head of household or more than $32,000 for a joint return, you know you have to pay some taxes on your benefits.
If you are above these limits of $25,000 and $32,000 you can use the IRS Social Security Worksheet to determine the exact amount of taxes, you will owe. Plug your numbers into the “IRS Figuring Your Taxable Benefits Worksheet”.
How to File Social Security Income on Your Federal Taxes
Now that you know how to determine if you have to pay taxes on your benefits and how to calculate the amount, you are ready to file your federal taxes. Since you do have to pay taxes on some portion of your benefits, you must file form 1040 A or 1040, not a 1040EZ.
When filing 1040 or 1040A
- You will need Form SSA-1099 for the amount of your total benefits. You will find this amount in box 3 of this form.
- Enter this amount on line 20a and the taxable amount you have figured on line 20b. (On 1040A enter total benefits on line 14a and taxable benefits on line 14b).
- Continue to complete 1040 or 1040A as usual, following the instructions on the form and in the booklet.
- If you have any concerns or confusion you can start an efile.com return for free and when you enter your Social Security benefits along with your other sources of income, the software will figure out if you have to pay taxes on your benefits. If you do the software will calculate it and prepare the necessary forms.
- Print the efile forms and use this information when you file 1040 or 1040A.
- If you have taxable benefits you cannot file online. You will need to mail your return.
Does Every State Tax Social Security Income?
Now that you understand the Social Security tax rate and filed your Federal tax return, it’s time to turn to your State tax return. Do you have to pay State taxes on your Social Security benefits? The answer is, it depends on the state. Depending on which state you live in there could be several different outcomes in regard to paying state taxes on benefits.
- Some states do not tax Social Security benefits.
- Some states tax some portion of your Social Security benefits following the same format as the Federal government.
- Some states tax benefits according to the Federal guidelines but offer deductions and exemptions to reduce your taxes.Those that Tax and Rate/Those that Don’t
Those that follow the same format as the federal income tax filing. Tax rate ranges from 50% to 85% for singles making over $25,000 and joint returns over $32,000.
- West Virginia
- North Dakota
Those that follow the federal format but offer deductions and exemptions to lower your tax burden.
- Rhode Island
- New Mexico
Those that follow do not tax social security benefits at all.
- New Hampshire
- North Carolina
- South Dakota
- District of Columbia
- South Carolina
How to File Social Security Income on Your State Taxes
Each state has its own tax form and tax rates. You can usually obtain these forms online or from your state offices. You would use the same formula you used for your federal taxes. This is your Combined Income = nontaxable income +adjusted gross income + ½ Social Security benefits. Insert this into your state tax form to determine if you owe taxes and how much. File your state taxes as you normally would.