When you reach the age where you can start receiving Social Security benefits, you may wonder whether you need to pay income tax on your Social Security benefits. Unfortunately, the answer is not simply yes or no. Your tax responsibility depends on other details about your situation. Social Security benefits may be fully or partially non-taxable.
If Social Security benefits are your only income
You are likely not required to pay federal income tax on your Social Security benefits if they are your only income. This means that your income from Social Security benefits may not be taxable if you have not invested in a 401(k) account, or if you do not rent out property for profit, or if you have decided to stop working altogether. These are just examples — the point is that you have no other income from any other source.
In some cases, you may not even need to file a tax return. However, you should always check with a tax professional before completely ignoring the requirement to file.
If you have income in addition to Social Security
Part of your benefits may be taxable if you have other sources of income in addition to your Social Security benefits. The amount that is taxable will either be 50% or 85% of your benefits. This depends on your remaining income.
You can use the Social Security benefits worksheet in the instructions for Form 1040 to calculate the taxable amount based on your personal circumstances.
To calculate your tax liability, you must first calculate your “combined income” and then compare it to the base amounts in the table below. Combined income is your total income from all other sources, including tax-exempt interest, plus half of your Social Security benefits.
These base amounts are used to calculate the taxable amount of your Social Security benefits. When someone’s income exceeds the base amount, but not the additional amount, they will pay taxes on 50% of their Social Security benefits.
| Filing Status | Base Amount | Additional Amount |
|---|---|---|
| Single | $25,000 | $34,000 |
| Head of Household | $25,000 | $34,000 |
| Qualified Widow(er) | $25,000 | $34,000 |
| Married Filing Jointly | $32,000 | $44,000 |
| Married Filing Separately and lived apart all year | $25,000 | – |
| Married Filing Separately and lived together at any time during the year | $0 | – |
Example
Suppose you are receiving $15,000 annually as investment income. You continue to work one day a week and earned $7,000 from that job over the tax year. You have received $18,000 annually in Social Security retirement benefits. Half of this amount equals $9,000.
So, your combined income is $31,000 ($15,000 in investment income + $7,000 in wages + $9,000 in Social Security benefits). If you are single, this means you will be liable for taxes because $31,000 exceeds the single limit of $25,000.
If you are married and file a joint tax return, and your spouse has no additional income (which means the $18,000 in Social Security benefits includes their income as well), you will not be liable for taxes because the limit for married filing jointly is $32,000.
Exceeding the base amount does not mean you will be taxed at 50%. It simply means that you must report 50% of your Social Security benefits income and pay tax on it. Your tax rate will be determined according to your income tax bracket.
You can make some adjustments to your income to avoid exceeding this limit. For example, you may want to consider giving up one day a week of work if it appears that your investment income and half of your benefits will push you over the temporary income limit.
Talk
to a tax organization, more than half of the states, plus Washington D.C., either do not impose an income tax or do not consider Social Security benefits in their tax considerations. The remaining states may tax Social Security benefits but do not all handle it the same way. Some of these states will tax up to 85% of benefits as the federal government does. Others tax Social Security benefits to some extent but offer reductions based on your age and income level.
You should consult a tax professional to determine if you qualify for any local tax reductions.
Frequently Asked Questions
What is the tax rate on Social Security benefits?
If your Social Security benefits are taxable (and they may not be if you do not have significant additional sources of income), this income will be taxed according to the standard tax brackets of the Internal Revenue Service (IRS). It should be noted that the full amount of your annual benefits will not be taxed. Depending on your income, you will pay taxes on 50% or 85% of your annual Social Security benefits.
Which states do not tax Social Security benefits?
According to
For the tax agency, there are 37 states and the District of Columbia that do not impose income tax on Social Security benefits: Alaska, Alabama, Arizona, Arkansas, California, Delaware, Florida, Georgia, Hawaii, Idaho, Illinois, Indiana, Iowa, Kentucky, Louisiana, Maine, Maryland, Massachusetts, Michigan, Mississippi, Nevada, New Hampshire, New Jersey, New York, North Carolina, Ohio, Oklahoma, Oregon, Pennsylvania, South Carolina, South Dakota, Tennessee, Texas, Virginia, Washington, Wisconsin, Wyoming, and the District of Columbia.
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Source: https://www.thebalancemoney.com/social-security-benefits-3193080
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