If you are receiving Social Security, you may have to pay income taxes on up to 85% of your Social Security benefits. This rule regarding taxation of benefits is different from the earned income rule, which applies if you receive benefits before reaching full retirement age, continue to work, and have amounts exceeding the maximum earnings limits.
Step 1: Determine Your Combined Income
Do you have income in addition to Social Security? Additional income sources that will appear on your tax return include:
- wages (earnings or self-employment income)
- investment income from interest, dividends, and/or capital gains
- retirement or annuity income
- IRA or 401(k) and/or 403(b) withdrawals
- rental property income
The Social Security Administration defines your “combined income” as the total of your adjusted gross income plus any tax-exempt interest, plus half of your Social Security benefits. Roth IRA withdrawals do not count as combined income, but interest from municipal bonds does. Your combined income is compared to the limits shown in the table below.
| First Threshold (Dollar) | Second Threshold (Dollar) |
|---|---|
| 25,000 | 34,000 |
| for single individuals | for married couples |
If your combined income is less than $25,000 for single individuals or less than $32,000 for married couples, your Social Security benefits will not be taxable for that tax year.
If your combined income exceeds the first threshold, a more complex formula will be used to determine how much of your benefits are taxable (up to a maximum of 85%).
Step 2: Enter Your Combined Income on the IRS Social Security Tax Worksheet
If your combined income exceeds the specified limits, a formula is applied by the IRS to determine how much of your benefits are taxable. The result of these calculations is that you will pay taxes on less than:
- 85% of your Social Security benefits
- 50% of the benefits plus 85% of the combined income amount over the second threshold
- 50% of the combined income amount over the first threshold, plus 35% of the combined income amount over the second threshold
You can work through the numbers yourself using the IRS worksheet to calculate your taxable benefits. There are also many online calculators that can help estimate your benefit amount; just make sure to use a reliable and trusted source.
Example: Taxation of Social Security for Married Couples
Let’s look at an example of a couple, both aged 67, who are married and filing jointly in 2022. One is receiving a spousal Social Security benefit. They are both waiting until age 70 to claim their full retirement benefit amounts, so they can get the maximum possible. During the delay, they are making significant withdrawals from a traditional IRA. Here’s a quick look at their income sources:
- $10,000 total Social Security income
- $50,000 IRA withdrawal
The first step in the process is to calculate their provisional income. This is done by taking 50% of the Social Security benefit and adding it to other income sources; the IRA withdrawal in this case. Based on the first step, their provisional combined income comes to $55,000 ($10,000 × 0.50 + $50,000), which exceeds the upper limit for married couples filing jointly. Using the Social Security tax calculation from step two above, 85% of their Social Security benefits will be taxable, or $8,500 will be entered in box 6b. They are not itemizing deductions but are using the standard deduction and exemptions for tax year 2022.
Their total adjusted income is $58,500, their standard deduction is $25,900, and the additional deduction for both spouses over age 65 is $2,800. Their taxable income is $29,800, the total taxes owed is $3,576, and the funds available after taxes for spending is $54,924 (excluding state taxes).
Now
Let’s take a look at the same couple three years later. Both are 70 years old and receiving their full Social Security benefit amounts. Here’s a quick look at their income sources:
- $40,000 total Social Security income
- $20,000 IRA withdrawal
Their provisional income is $40,000 ($40,000 × 0.50 + $20,000). This figure falls between the specified thresholds for married couples filing jointly. Using a free online Social Security calculator, we see that 50% of their Social Security benefits will be taxable, or $20,000 will enter box 5b. They are not itemizing deductions but are using the standard deduction and exemptions.
Their total adjusted income is $40,000 ($40,000 × 0.50 + $20,000). Their standard deduction is $25,900. The additional deduction for both spouses being over 65 years old is $2,800. Their taxable income is $11,300. The total taxes due is $1,356. The funds available after taxes for spending is $58,644 (excluding state taxes).
In both years, the couple has $60,000 in gross income. However, after both reach age 70 and because a larger percentage of their income will come from Social Security, their tax liability will decrease, and they will have more money to spend.
How to Use Tax Strategy to Your Advantage
If you design a retirement income plan that takes advantage of this tax strategy, it can make a significant difference over your retirement years. You can pay less in taxes and have more to spend.
There are many ways you can plan to reduce taxes when you start withdrawing funds. The most common strategy is to delay claiming Social Security benefits until age 70 while taking IRA withdrawals or using Roth conversions in your sixties. This may not be the best option for everyone, but for many families, this approach leads to lower total taxes paid during retirement years.
Much of this planning relates to how other income sources affect the amount of taxable Social Security benefits. By planning the timing of those other income sources, many people can reduce their tax bill.
The Balance does not provide tax, investment, or financial advice. Readers should consider consulting a financial professional to determine a suitable strategy for retirement savings, taxes, and investments.
Source: https://www.thebalancemoney.com/taxes-on-social-security-benefits-2388850
.lwrp .lwrp-list-double{
width: 48%;
}
.lwrp .lwrp-list-triple{
width: 32%;
}
.lwrp .lwrp-list-row-container{
display: flex;
justify-content: space-between;
}
.lwrp .lwrp-list-row-container .lwrp-list-item{
width: calc(12% – 20px);
}
.lwrp .lwrp-list-item:not(.lwrp-no-posts-message-item){
}
.lwrp .lwrp-list-item img{
max-width: 100%;
height: auto;
object-fit: cover;
aspect-ratio: 1 / 1;
}
.lwrp .lwrp-list-item.lwrp-empty-list-item{
background: initial !important;
}
.lwrp .lwrp-list-item .lwrp-list-link .lwrp-list-link-title-text,
.lwrp .lwrp-list-item .lwrp-list-no-posts-message{
}@media screen and (max-width: 480px) {
.lwrp.link-whisper-related-posts{
}
.lwrp .lwrp-title{
}.lwrp .lwrp-description{
}
}
.lwrp .lwrp-list-multi-container{
flex-direction: column;
}
.lwrp .lwrp-list-multi-container ul.lwrp-list{
margin-top: 0px;
margin-bottom: 0px;
padding-top: 0px;
padding-bottom: 0px;
}
.lwrp .lwrp-list-double,
.lwrp .lwrp-list-triple{
width: 100%;
}
.lwrp .lwrp-list-row-container{
justify-content: initial;
flex-direction: column;
}
.lwrp .lwrp-list-row-container .lwrp-list-item{
width: 100%;
}
.lwrp .lwrp-list-item:not(.lwrp-no-posts-message-item){
}
.lwrp .lwrp-list-item .lwrp-list-link .lwrp-list-link-title-text,
.lwrp .lwrp-list-item .lwrp-list-no-posts-message{
};
}
Leave a Reply