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Social Security benefits can be taxed; you need to know the rules

by Maurice Draine | Contributor
August 17, 2020


Understanding our country’s tax structure can be daunting. There always seem to be new regulations, changes to the system and obstacles that need to be overcome to get your taxes filed correctly every year. For older Americans, understanding their retirement benefits and taxes in the form of Social Security income can be confusing. Here is more information on when and how Social Security benefits could be taxed.

What are Social Security benefits?

Social Security benefits are part of a federal program that delivers financial support to qualified retirees and other applicable groups. Social Security is officially run through the federal Old-Age, Survivors and Disability Insurance program. This program provides financial support for seniors, but it also helps support disabled citizens and spouses, children and survivors whose spouse or ex-spouse has passed away.

Individuals contribute to their Social Security benefits during their working years. Credits are accrued based on total yearly wages or income obtained from self-employment. The amount of money that would need to be earned to get a credit change every year; in 2020, that amount was $1,410. At least 40 credits are required to qualify for full Social Security benefits when you retire. Credits can be added to your Social Security income until you are 70 years old.

Social Security benefits are based on your earning history, when you were born and when you start claiming your Social Security income. These three factors will also influence how much tax you might be expected to pay for your benefits.

When can I claim my Social Security benefits?

Social Security was designed to provide some replacement income for workers who are at or past retirement. This age is currently set at 66 years and two months for people born before 1955 and 67 years of age for people born after 1960. Individuals who are qualified to do so may be able to start receiving benefits as early as 62. Some people choose to defer their Social Security until they are 70, which can increase their monthly benefit payout.

Are my Social Security benefits taxed?

In some cases yes, your Social Security benefits will be taxed. There are a few factors that determine whether your benefits will be taxed and how much they could be taxed. These factors include:

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  • Your AGI, or adjusted gross income
  • Your tax filing status
  • Where you live

Federal taxes could be taken out of your benefits, depending on what tax bracket you are in. The formula for determining your taxable income is as follows: add your adjusted gross income (AGI) to your non-taxable interest. Calculate your Social Security benefit amount, and add half of that number to your AGI and non-taxable interest total. This is the amount that will determine your federal tax bracket.

Your tax filing status will also influence how much tax you might have to pay on your benefits. If you are a single filer, you won’t be taxed on income below $25,000. If you file jointly with a spouse, you won’t be taxed if your income is under $32,000.

If you make over $25,000-$34,000 as a single filer or over $32,000-$44,000 as a joint filer, you are in the 50% tax bracket. This doesn’t mean that 50% of your reported income will be taxed; either half of your Social Security income will be taxed, or half of the remainder between your income and tax threshold will be taxable (whichever amount is lower).

If you make more than $34,000 as a single filer or over $44,000 as a joint filer, you are in the 85% tax bracket. The calculation for this tax bracket is slightly more complicated, but it again doesn’t mean that 85% of your income will be subject to taxation. These are the only federal tax brackets that apply to Social Security.

If you live in one of the following states, there are also state taxes you will need to pay on your Social Security income:

  • Colorado
  • Connecticut
  • Kansas
  • Minnesota
  • Missouri
  • Montana
  • Nebraska
  • New Mexico
  • North Dakota
  • Rhode Island
  • Utah
  • Vermont
  • West Virginia*

*West Virginia is phasing out its state tax on Social Security benefits by 2022.

Each state will have its formula for calculating state taxes on Social Security income. Individuals are advised to look into how their state taxes will influence how much they owe on their Social Security benefits each year, as regulations can change.

If you are receiving Social Security because you are disabled, this income will most likely be tax-free. If someone receives dependent or survivor benefits, this income will not count toward your total taxable total.

Can I reduce the tax I pay on my Social Security benefits?

There are ways to make paying taxes on your Social Security income easier. The IRS offers the option of automatic withholding, or individuals can pay what they estimate is their Social Security tax quarterly to avoid paying it all at tax time.

If you are close to a lower tax bracket, there are a few ways you can reduce your taxes. You can make charitable donations or other non-taxed financial contributions. If you have a Roth retirement account, you can spend down that money, as it won’t count toward your annual taxable income. Using this money to supplement the income you receive from Social Security could keep you in a lower tax bracket.

Additionally, seniors can choose to delay their Social Security payout until they are 70 years old. If you continue to have an income during this time, your Social Security monthly income will increase until you are 70. This delays the benefits you’ll have to pay taxes on for a few more years.

Looking ahead with Alliance America

Taxes on Social Security benefits are expected to increase as the years go on because they do not rise with inflation. Older Americans should keep an eye on federal regulations around Social Security income and their specific state’s tax laws that could change annually.

Alliance America can help

Alliance America is an insurance and financial services company. Our financial professionals can assist you in maximizing your retirement resources and achieving your future goals. We have access to an array of products and services, all focused on helping you enjoy the retirement lifestyle you want and deserve. You can request a no-cost, no-obligation consultation by calling (833) 219-6884 today.

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