Well, it depends. Originally, it used to be pretty simple, Social Security benefits weren’t subject to taxes at all. However, the good ol' days ended in 1983 when Congress amended the Social Security Act to begin making a portion of your Social Security benefits subject to federal income taxes.
The number of people paying tax on their Social Security benefits has gone up steadily over the years. In 2014, (the most recent year for which IRS data is available), almost 70% of taxpayers receiving Social Security benefits indicated that some of their benefits were taxable. The good news is everyone gets 15% of their benefits tax-free no matter what their income is.
How To Figure If Your Social Security Benefits Are Taxable?
Step 1: Figure out what your “provisional income” is. (WHOA, slow down, that's tax lingo)...no worries, here’s the basic formula:
Your Adjusted Gross Income (For most people, you can find this on Line 37 of your Form 1040)
+ Nontaxable interest (For most people, you can find this on Line 8b of your Form 1040)
+ 1/2 of your Social Security benefits:
Your Provisional Income
Step 2: Depending on your filing status, use the chart below:
If you're married and file a separate return, the income threshold is zero. In other words, your benefits will probably be taxable, regardless of your income.
What About State Taxes on Social Security Benefits?
Figuring out if your Social Security benefits are subject to state income taxes gets a little more complicated. Some states offer exemptions and credits based on age or income. For instance, most of my clients reside in my home state of Kansas which excludes Social Security benefits from state income taxes for residents with a federal adjusted gross income of $75,000 or less.
Can You Cut Your Tax Bill On Social Security?
There’s several strategies out there that can help you reduce or even avoid paying taxes on your Social Security benefits all together. For instance, many people claim early Social Security benefits even while they still have jobs, but the odds are much larger in that situation that your work income will push you over the thresholds. The same is true for married couples in which one spouse has retired but the other is still working. If you wait until that income goes away before taking benefits, your monthly payments will not only be larger but they might also be less likely to be subject to tax.
Preventing Uncle Sam from taxing your Social Security benefits takes some careful planning. If you’re interested in maximizing your Social Security benefits, CLICK HERE.
About the Author:
Desmond Henry is a fee-only CERTIFIED FINANCIAL PLANNER™ professional and founder of Afflora Financial Life Planning in Topeka, Kansas. He helps the retiring/retired plan their finances and invest their money. CLICK HERE to learn more.