Are Social Security Benefits Taxable?

In all the years that you save up for retirement, you have certain questions. How much do I need to save up? What are my best retirement options? What age am I going to retire?

When it comes to actually planning for being in retirement, your questions change. How much can I spend each year? How long will my nest egg last? Will my Social Security benefits get taxed?

Taxes are incredibly complicated any year, whether you’re in your working years or retirement. During your working life, you pay Social Security taxes with the expectation of receiving them in retirement. When you do retire, you can start collecting benefits.

Even though these are benefits paid for by taxes you’ve already paid, you can still wind up paying taxes on the benefits you receive. How much you pay for taxes on Social Security benefits is based on a number of factors, including your income level and whether or not you’re filing an individual return or a joint one.

Is Your Social Security Taxable?

Under Internal Revenue Service rules, you might get Social Security benefits and still have to pay income tax on them. How much you would pay is calculated based on what the IRS calls “combined income.” That’s your adjusted gross income plus half of your Social Security payments plus nontaxable interest.

As much as 85% of the Social Security benefits you receive might be taxable under two different scenarios. First, you file an individual federal tax return and you have a combined income greater than $34,000. Second, you file a joint federal tax return and the combined income of both you and your spouse exceeds $44,000.

In some cases, only half of your Social Security benefits get taxed. One such case is when you file an individual federal tax return with a combined income range of $25,000 and $34,000. Another instance is if you file a joint federal tax return and the combined income of you and your spouse ranges from $32,000 to $44,000.

You Need Your SSA-1099

The Social Security Administration is supposed to send you a form every January that details the benefits you received during the previous tax year. This is known as a Social Security Benefit Statement. It’s also just known as an SSA-1099. You can use it to determine how much you might owe when you file a federal tax return. If you receive Social Security benefits, then this document is supposed to be mailed to you automatically. If you don’t get it in the mail, then you should be able to go online to your “my Social Security” account and find a printable version.

Other Factors You Should Consider

While income from Social Security is probably taxable through your federal tax return, there are several factors that decide it. Your likelihood of paying federal taxes on Social Security benefits goes up as your income does. If you still work a part-time job in retirement, or if you get retirement income from investments, such as a 401(k) plan or IRA, then you will likely pay taxes on any Social Security payments you get.

However, if your only retirement income is the Social Security checks that you get, then you likely won’t pay taxes on your benefits. Having said that, you should consult a qualified tax professional to make sure that your situation fits this.

Also, you need to possibly watch out for state-level taxes on your Social Security benefits. Part of this depends on what state you live in, as some might tax your checks when others don’t. Among the ones that do tax Social Security benefits, the rules and qualifying income levels are unique to each state. If you use a tax professional or tax software, make sure they know the rules for the state that you reside and file in.

One thing you should know about the federal taxes on Social Security benefits is that you’ll never be taxed on more than 85% of your benefits. Whether it’s none, 50%, or 85% you are taxed for, the final 15% of your benefits are all yours and not touched by the IRS.

Avoiding Social Security Taxes in Retirement

If you want to avoid Social Security taxes in retirement, then there are three primary ways of accomplishing this. They include only living off your benefits, minimizing other sources of income, or using investment vehicles that wouldn’t get taxed.

Living off of just your Social Security checks has a high likelihood of preventing federal taxes from applying. However, it’s not a given. The other downside is that for most retirees, Social Security benefits are simply not enough to live off of.

Minimizing other sources of income helps reduce your combined income. You might consequentially lower the amount of taxable income you have to pay less, or you might even get so low that federal taxes don’t apply. However, you’re also restricting your available income to live off of and enjoy retirement. The impact on your quality of life might be too much.

Using investment vehicles that don’t get taxed is another way to avoid Social Security taxes when you are in retirement. While 401(k) and many IRA distributions might be taxed, there is a potential exception with the Roth IRA format. You invest in these with after-tax dollars, so the taxes are already paid on that income. You’re also not forced to withdraw your funds based on date or age, whereas many retirement plans might require you to start withdrawing by the age of 72 or 73.

Simplify Your Payments

When you were still in your working years, your Social Security taxes might have been automatically withheld from every paycheck you received. If you want to simplify your Social Security taxes in retirement, then just make sure they keep getting withheld from your income. Fill out the Voluntary Withholding Request Form W-4V. It’s only got seven lines, so it’s one of the easier tax forms out there. You can choose one of four different withholding options, with the lower two being 7% and 10% and the higher two being 14% and 22%. Once you fill it out, drop it off or mail it to an SSA office.

You can also make and file estimated taxes on a quarterly basis if you don’t want to go through withholding. Estimated payments can be more accurate, so you don’t wind up with a Social Security tax bill every April. However, you will need to manually make these payments on a regular basis. You might already be familiar with these due to self-employment income.

Each payment method has advantages and disadvantages. Fortunately, you can switch back and forth between them as you see fit.

Final Thought

No one wants to pay more taxes than they have to, and this is even more crucial in the retirement phase of life when your finances might be limited and need to last you the rest of your life. If you actually have enough income in retirement to trigger taxes on Social Security benefits, then that’s a sign you’re doing relatively well. You likely have more money available than just Social Security itself. Still, you want to save on taxes so you can enjoy more of that income. Just having a plan is a great start. Be sure it accounts for Medicare costs, however. Parts A, B, C, and D all have different expenses, and they can make your tax liability move up or down in various circumstances.