When to Pay Taxes on Social Security Benefits

Income taxes are often high enough‌ during ⁤your working years, but did you know that some people will have to pay taxes on their Social Security income even during retirement? It’s ‌true! Even ‍though ⁣they paid into the system for years, the Internal ⁢Revenue​ Service‍ (IRS) still wants a portion when they start receiving their benefits. In fact, as ​many as 56 ‍percent of people on Social Security pay⁤ taxes on their⁤ benefits.

Like all ‍other federal taxes, these taxes are based on your income. When you retire, you may have multiple sources of income that include pensions, retirement accounts such as IRAs or ⁤401(k)s, and​ more. When added together, your‌ income⁣ could ‍easily ⁣surpass the income levels permitted.

The good news is that if your only retirement income is from Social Security, it is doubtful that you will owe any taxes on it. Since the allowable income levels are rather low, almost any other income stream from a retirement account (or part-time job) could cause you to pay taxes on your Social Security.

The Income Limits ‍Defined

When the​ IRS looks for taxable money,​ it counts all your income. The IRS says supplemental security income ‌(SSI)‍ payments​ are an exception. ⁣These payments are⁢ not taxable and‌ are ⁤not considered part of ⁣your income.

When ⁢calculating your income, you only count half of your Social Security⁢ benefits and all other income (you must include tax-exempt interest). Individuals (including heads of household and a qualifying surviving spouse) earning $25,000–34,000 will have to pay tax on half their‍ benefits. This ceiling level also ⁤applies to married ⁣people who file separately but have lived apart⁣ for the entire year. When singles earn more​ than $34,000, as much as 85 percent of⁤ their ⁣Social Security benefits ‍are taxable. The remaining 15 percent will never be taxed.

Married couples that file jointly earning ⁣$32,000–44,000 will have to pay taxes on‍ half of their Social Security benefits. If they are still married but lived with⁤ their spouse for any time during the year, all income is taxable. ⁤When married couples filing ⁤jointly earn ⁤more than $44,000‌ combined, they will pay taxes on up to 85 percent ‍of their benefits.

Supplemental Security Income payments are not taxable. The AARP says that ⁢children who receive dependent or survivor benefits ⁤may need to file and pay taxes if their income⁣ exceeds the basic income levels.

Some ⁤States Also Tax⁢ Retirement Benefits

Besides paying⁣ tax on your Social‌ Security benefits to the​ IRS, you may live in a state where ‌it also collects taxes on retirement benefits. ⁢According to Investor.Vanguard, 13 states currently tax Social⁣ Security income. These states include Colorado, Connecticut, Kansas, Minnesota, Missouri, Montana, Nebraska, New Mexico, North Dakota, Rhode ​Island, Utah, Vermont, and West Virginia. Some of these states may be changing who they tax in ‍the next few years.

If you want to avoid⁣ the additional​ state taxes on your‌ retirement income and possibly other income if you work beyond your full retirement age, you may consider moving to a different state. Some states do not charge income⁤ taxes, which will help keep more money in your pocket. They may, ‌however, charge higher property taxes than other states.

How to Reduce or Eliminate Social Security Taxes

Having more income that puts you above the tax-free limits means you need⁣ to⁣ reduce it to fit within those tiers. If you are⁤ not yet receiving money ⁢from an IRA or 401(k), you can convert it to ⁣a ⁤Roth 401(k) or a Roth IRA. These retirement accounts ⁣do not have any required minimum distributions, allowing you ⁣to control your taxable income better.