When people think about social security, they think about income that they have already earned but must wait until retirement to receive. While that is true, that does not necessarily mean that you are off the hook for taxes. In fact, there are several factors that go into determining if the benefits that you receive for social security are actually subject to income tax or not. This depends on your income, filing status, and a few other factors. Let us now dive in a bit further into this topic and explain how you can know if your retirement benefits are actually taxable.
It really depends on your income. In reality, as much as 85 percent of the benefits that you receive from Social Security could be taxable in the end. The IRS actually provides a form that you can use to better determine this. Referred to as IRS Publication 915, this is a worksheet that will help you figure out if the amount you receive in Social Security is subject to tax withholding or not. This form is actually accessible on a computer and opens into a PDF. An even easier way to determine the taxable nature of your retirement benefits is to use a Social Security tax calculator. This will quickly and easily tell you what you need to know.
Taxable Nature of Social Security
Since income tax is based on your income, your social security may not be taxed if it is your sole source of income in retirement. However, keep in mind that taxes are based on your combined income. This means that you will need to add other sources of income to your social security to determine if you actually need to pay taxes. The sources of income, in other words, are not to be considered separate entities. It is your adjusted gross income (AGI, plus any income you receive for interest and 50 percent of the benefits that you receive from social security.
That might seem complicated when written out like we just did, but here is a simple formula that might make it easier.
Combined Income = AGI + Interest + 1/2 social security benefits.
Now, in order for your retirement benefits to actually be taxed, you will need to have a combined income that is over $25,000. That is if you are single. If you are married, and you file a joint tax return, then the amount increases to $32,000. Keep in mind that only 50 percent of your Social Security is actually considered for tax purposes. Since social security benefits never go over $44,376 a year, it would not be possible to owe taxes if that was your sole source of income during any single year. If you are married, both of you would need to be considered high wage earners in order for your Social Security benefits to go over the amount allowed.
When Are You Taxed?
For your Social Security benefits to be taxed, you would need to have a substantial source of income outside of that money. One thing that we should mention that if you are married and file separate tax returns, then you will almost certainly need to pay tax, no matter what your income might be.
Calculating the tax that you actually can get a bit tricky. If you are single and have an income from all sources of between $25K and $34K, then 50 percent of your Social Security benefits may be taxed. This amount will actually increase to 85 percent if you have a combined income in excess of $34,000. On the other hand, none of your Social Security benefits are taxable if your income is below $25,000.
To summarize the rules for a married couple filing joint tax returns, remember that the low wager earner threshold is between $32K and $44K. If you earn in that range, then you would owe taxes on 50 percent of your Social Security benefits. Anything over $44,000 in annual income will get you into the 85 percent tax bracket when it comes to Social Security benefits. If you file separately when you are married, then you will need to pay taxes on up to 85 percent of your social security benefits, no matter what your income might be.