The Taxable Social Security benefits were initially exempted from taxes but since 1937, January they have been taxable if your income surpasses the threshold level. Since the introduction of the Social Security program in 1935, federal insurance has been given to the citizens of America after retirement, death, or disability, aimed at ensuring financial security. Still, the misconception of tax-free social security benefits prevails among many and it’s the need of the hour to get the facts right regarding taxable social security benefits.
What are Taxable Social Security Benefits?
According to the financial system of the state, around 40% of the beneficiaries of social security benefits are required to pay federal income taxes on these. This tax is imposed when an individual has other prominent sources of income such as their own business, dividends, employment, interest, or any other taxable income in addition to these benefits.
The taxation is imposed in such a way that tax applies to a certain percentage of your benefits, which depends on the tax bracket you are in. The employee rate at the beginning of this payroll tax was 1% and has steadily increased over the years. These payroll taxes are collected from employers and employees to fund social security benefits.
When are Social Security benefits taxed?
As per the rules of the Internal Revenue Service (IRS), an individual should pay taxes on their social security benefits based on their filing status and combined income :
- Combined Income
Your AGI (Adjusted Gross income) from all sources such as wages, investments, and interest plays a crucial role in determining your combined income in addition to your taxable social security benefits. The combined income can be calculated by adding your AGIs with half of your social security benefits. If this value exceeds a certain threshold, a part of your taxable social security benefits are taxed. - Filing Status
The taxable Social Security benefit thresholds can vary based on your filing status. The three main categories under which you can file are:- Single, the Head of Household, or a Qualifying Widow(er)
- Married and filing jointly
- Married and filing separately
| Tax Filing Status | The Threshold income above which benefits are taxed | Tax Percent applied |
| Single | $25,000 | up to 50% |
| Married, filing jointly | $32,000 | up to 50% |
| Married, filing separately | $0 | Varied |
If you are married and chose to file a separate tax return and have lived apart the entire year, you are still subject to tax on your benefits.
Calculate Your Taxable Social Security Benefits and Incomes
The Old Age, Survivors, and Disability Insurance Program (OASDI) tax or Social Security tax is determined by the government every year as a percentage of income. These apply to the paychecks of employees, employers, and self-employed individuals. To avoid over-taxing, a certain limit set on taxable wages each year is the tax cap. For 2023, the cap of maximum annual employee contribution was at $9,932.40 and the cap for 2024 is at $10,453.20.
Suppose you are an employee earning $169,200 per year, then as per the maximum-in wage that can be taxed in 2023, you would be subjected to tax. Since you receive a paycheck of $14,100 per month, an amount of $874.2 which is the product of your monthly income, and 0.062(6.2% tax rate), will be withheld as tax. In case you are self-employed, the tax rate withheld from your salary would be double that of an employee or employer. This implies that you would pay $1748.4, which is 12.4% of your monthly income.
Taxable Social Security Benefits Tool
The tool to use to get know if you are subjectable to tax on your benefits is the Interactive Tax Agent (ITA) by the IRS. This quick and efficient online tool with an easy-to-use interface gives personalized answers and suggestions to various queries regarding whether or not to file a tax return, what kind of tax form to use, and how to report multiple incomes, deductions, and credits you might be eligible for, and much more. Still, an ITA is not as good as a qualified tax professional who can assist you with complex tax issues or additional guidance.
Withholding Taxable Social Security Benefits
This provision is for those who are worried about owning taxes on SSB. This lets you withhold your federal taxes from your monthly Social Security payments by prepaying a section of your tax bill. While applying for social security or filling out the IRS Form W-4V, you can choose from the options 7%, 10%, 12%, 22%. To cover anticipated tax liability, you can also make quarterly estimated tax payments.
Filing Social Security Income on Your Federal Taxes
Once you have realized the amount of tax payable on the taxable social security benefits (if any), it is legally required that you acknowledge it to the IRS. On failing to do the same, you may be subjected to penalties for non-compliance that range from about 5% to 25% of the unpaid tax every month, interest on the unpaid taxes, difficulties in obtaining other government benefits, civil lawsuits, damage to your credit score, and so on.
Therefore every year in January, get a Taxable Social Security Benefit Statement (Form SSA-1099) explaining your prior year’s benefits. Visit the Social Security website, using the instructions and the benefit statement that you just obtained, and identify your Taxable Social Security Benefits.
State Taxes on Social Security Benefits
There are a total of 11 states that have Taxable Social Security benefits :
- Connecticut
- Kansas
- Minnesota
- Colorado
- Missouri
- Montana
- New Mexico
- Rhode Island
- Utah
- Vermont
- Nebraska
Among these states, Colorado is an exception for offering deductions for retirement income and the residents over the age of 65 don’t have to pay taxes on their taxable social security benefits. For federal taxes collected by agencies, the amount payable varies based on one’s income and other criteria. West Virginia phased out of taxing these benefits completely by 2020. The rest of the states do not collect taxes or do not give taxable social security benefits.
Other Taxable Benefits
Now that we know taxable social security benefits, let us look into the other benefits and their taxable features.
- Spousal benefits: These benefits are received by a spouse, based on their partner’s record. For those who individually earn over $25,000 and receive Spousal Social Security benefits, 50% of the benefits are taxable and for an income over $34,000, 85% of the benefits are taxable.
- Disability benefits: The disability benefits by the government are also taxed if the beneficiary’s combined income is over the threshold value. This threshold value stands to be the same as that of Social Security, $25,000 for individuals, and for a couple filing jointly is $32,000.
- Survivor benefits: This particular benefit provided for children is not subjected to taxes as they don’t generally have another source of income that crosses the threshold whereas survivor benefits from life insurance, employer-sponsored plans, and veterans’ programs have different tax implications.
- SSI benefits: Supplemental Security Income (SSI) is a federal program that provides financial aid to vulnerable sections, the blind, the disabled, and those aged 65 and over. It is not a taxable social security benefit and is therefore not taxed.
Tips for Saving on Taxes in Retirement
Though the law demands taxable social security benefits, there are several methods you could adopt to either avoid paying them or minimize the amount paid.
Ideally, if you keep your combined income below the required minimum of income to pay tax, you won’t have to pay any taxes. But this might not be practical for many. The other strategies you might look into are:
- Choosing when to claim benefits
For retirement or Taxable Social Security benefits, you may either start receiving them on retirement, as early as at the age of 62, or delay the same. These approaches tend to benefit people under different circumstances. - Delay claiming benefits
This is done by postponing the claiming of benefits until a certain age between 62 and 70. For each year of not claiming the benefits, the amount increases by 8%, until the specified age limit. This is mainly due to COLA and it remains unchanged. Yet factors like life expectancy, future income, and financial status must be analyzed before choosing an approach. - Withdrawing Taxable income before retirement
In this approach, we tried to reduce the overall tax burden by moving taxable income to lower-tax pre-retirement years from high-tax retirement years while receiving Taxable Social Security Benefits. This can be done by withdrawing funds from retirement accounts before receiving Taxable Social Security Benefits which can be done without any penalty after the age of 59 1/2. Tax payment is required at this step which would eventually lower the combined burden of taxes on both withdrawals and taxable social security benefits in the future. In addition to the factors mentioned above, risk tolerance for market fluctuations in retirement accounts should also be considered carefully, balancing the tax impact on withdrawals. - QLAC Purchase
Purchasing a deferred annuity, like QLAC (Qualified Longevity Annuity Contract), which is a long-term commitment that guarantees lifetime income, can also be beneficial in minimizing taxes. These annuities funded from qualified accounts( Roth IRAs and 401(k)) guarantee monthly payments for the rest of your life on investment of up to 25% of your retirement account or $135,000, whichever is less. Its relevance in minimizing the taxable income is when you delay retirement account withdrawals, you defer to pay taxes until QLAC initiates the payment to you.
This indeed reduces a significant amount of your taxes as it becomes taxable if your combined income exceeds the specified amount. Suppose you moved a certain amount from your retirement account to QLAC. You get guaranteed monthly payment till the end of your life and the money you moved to QLAC before retirement is not considered as your income until you start receiving the payment. - Converting to a Roth IRA
In a Roth account, contributions or taxes are paid upfront using after-tax dollars unlike using pre-tax dollars in traditional ones. These can be Roth IRA or Roth 401(k) where withdrawals after the age of 59 ½ and an account holding history of at least 5 years are completely tax-free. Whereas in traditional accounts, you still have to pay taxes or withdrawals just like for income in retirement. Therefore one of the main reasons to prefer Roth IRAs over traditional accounts is the tax-free withdrawal which doesn’t add to the tax burden. Having both Roth and traditional accounts and strategically managing them for withdrawals can be a key to saving. This would be primarily considering non-taxable sources, then the other taxable accounts, and finally, Taxable Social Security Benefits can be availed.
Impact of COLA Increase in Taxes
The cost-of-living adjustment (COLA) impacts the amount you pay on tax, especially during high inflation. At times like these, you might be moved into a higher federal income tax bracket. On the bright side, there has been a significant downfall in the COLA from 8.7% in 2023 (the highest COLA in over 40 years) to 3.2% in 2024.
Charity Without Tax
On reaching 70 1/2, in your retirement you can make donations to charities through the IRA called Qualified Charitable Distributions (QCD). Apart from being a donation to those in need, this also helps you with your tax burden. These donations count towards your required RMD(Required Minimum Distributions) obligations which are mandatory withdrawals one must make from certain of your retirement account on reaching a specific age. This in turn reduces the taxable income you withdraw from your IRA. One can donate up to $100,000 per hour through QCDs which are not taxed. This is another way of minimizing the taxable social security benefits along with supporting your favorite cause.
Learn more about taxable social security benefits
Conclusion
It is vital to make guided and informed decisions on your finances, especially during your retirement. Though taxable social security benefits are financial aid to those in retirement, not realizing if they are taxable and not paying those duly on time can put you in further financial chaos. This regressive tax which had a threshold of $160,200 in 2023 now increased to $168,600.8 in 2024 which implies that anyone earning below these numbers is required to pay a tax rate of 6.2% and those who are self-employed need to pay a total of 12.4%.
Despite ensuring this same rate for everyone, this scheme seems to exploit those having lower incomes as those earning around $1 million per year only need to pay a very small portion of their income whereas the low-income employers or employees end up paying much of what they have, putting them in a financial tough spot. One of the measures that can be taken to even this out would be setting a higher cap for wealthier individuals. Still, by properly examining how various sources of your income add to your tax rate and adopting the right measures, you can minimize the amount payable and enjoy your retirement with the comfort of financial security.
Also Read – Financial Assets in Retirement Planning: Securing Your Future
Frequently Asked Questions
Can I have taxes withheld from Social Security?
Yes. If you want taxes withheld from your taxes, you can do so by mentioning the same when you file your claim for Social Security benefits. Once you are already getting your benefits, fill out an IRS Form W-4V, which is a voluntary withholding request.
At what age is Social Security No Longer Taxed?
As per the legalities in the USA, Taxable Social Security benefits are taxed irrespective of age but based on one’s income. The tax payable varies from 0% to 85%. In other words, you may not have to pay taxes on your benefits (ie, a 0%) if your income lies below the specified minimum.
Are taxable Social Security benefits for survival children considered as income?
Yes, although the social security survival benefits for children are provided to support them financially and the additional income they make is not much, they can be subjected to taxes. Taxability of the benefit is based on the income of the beneficiary and it should be calculated separately if both you and your child receive these benefits.
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