Is Social Security income taxable? That depends on your income. In principle, the answer is yes, Social Security income is taxable. In practice, it’s not quite that simple. If you have other income in retirement, income from a 401(k), for example, then you should expect to pay taxes on our Social Security benefits. If you rely exclusively on your Social Security checks, you probably won’t pay taxes on your benefits.
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Originally, Social Security benefits weren’t subject to taxes. Those good old days are gone, however. Not everyone pays taxes on their Social Security benefits and everyone gets 15% of their benefits tax-free. But if you have retirement income from other sources (a 401(k), a pension, a part-time job), your income will probably be over the limits set by the Social Security Administration for tax-free benefits. That means you could pay taxes on up to 85% of your Social Security income.
IRS Income Limits
In 2015, the IRS limits for calculating tax liability on Social Security are as follows:
People filing as individuals with a combined income of $25,000-$34,000 must pay income taxes on up to 50% of their Social Security benefits. For individuals with a combined income of more than $34,000, up to 85% of Social Security benefits will be subject to income taxes.
For married couples filing jointly, those with a combined income of $32,000-44,000 will pay income taxes on up to 50% of their Social Security benefits. Couples with combined income of more than $44,000 should expect to pay taxes on up to 85% of their Social Security benefits.
By “combined income” (also known as “provisional income”) the IRS means your Adjusted Gross Income + Nontaxable Interest + 1/2 of your Social Security benefits. As of today, no one pays taxes on more than 85% of their Social Security benefits.
The average monthly Social Security benefit check is $1,294. That means an annual income of $15,528. So, if your benefits are near average and Social Security is your only source of income in retirement, you won’t hit the threshold for paying taxes on any of your benefits. Not sure about your Social Security income? You can consult form SSA-1099 for a summary of your benefits.
Federal Taxes on Social Security Income
If you do pay taxes, here’s how it’ll go: The Social Security tax rate is the same as your regular income tax rate. Say you’re filing as an individual. For every dollar of income you have over $25,000, $0.50 of your Social Security benefits may be subject to federal income tax. That rises to $0.85 for ever dollar over $34,000 that you claim in income.
If you’ve figured out that 50% of your benefits will be subject to tax, the amount you include in your taxable income will be the lesser of either a) half of your annual benefits or b) half of the difference between your combined income and the IRS threshold. Things get more complicated for those paying taxes on 85% of their benefits. The IRS offers both a worksheet and e-file software to help retirees calculate their Social Security tax liability.
Find out now: Calculate Your Social Security Income
The Impact of Roth IRAs
If you’re concerned about your tax burden in retirement, you may want to consider saving in a Roth IRA. With a Roth IRA, you save after-tax dollars. Down the road, you won’t have to take Required Minimum Distributions (RMDs) as you would with a traditional IRA or 401(k). You also won’t have to pay taxes on the money you take from a Roth IRA in retirement because you’ve already paid taxes on it.
So, Roth IRAs won’t add to your provisional income for the purposes of calculating whether your Social Security benefits will be taxed. If you’re worried about paying taxes on your Social Security, drawing from a Roth account can help your income stay below the IRS threshold.
Simplifying your Social Security Taxes
To avoid tax-time sticker shock, you can pay taxes on your Social Security income throughout the year. There are two ways of doing this. You can ask the Social Security Administration to withhold taxes from your benefits checks by submitting IRS form W-4V or you can pay quarterly estimates like you would with taxable investments.
State Taxes on Social Security Benefits
Wondering whether your Social Security benefits will be subject to state and local income taxes? It’s complicated, and your best bet is to check with your local authorities (or your accountant). Some states offer exemptions and credits based on age or income.
The majority of states exempt at least some Social Security income from their taxes, but there’s a range. Alaska doesn’t tax income at all, while a handful of states tax Social Security benefits to the extent that they’re taxed at the federal level. As with federal taxes, if Social Security is your only source of income (putting you in a low income tax bracket), you likely won’t have to pay taxes on your benefits.
Most of us don’t enjoy paying taxes, but look at it this way: If your retirement income is such that your Social Security benefits are subject to taxes, you’re doing pretty well. It means you have income from other sources and you’re not entirely dependent on Social Security to meet your living expenses.
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