01 May Are Social Security Benefits Taxed?
The short answer is probably, but the good news is no one pays taxes on 100% of their benefit. Many people are surprised to find out that their monthly Social Security income is not tax-free. Most Americans pay federal taxes on their benefits, and some pay state taxes as well. Your total benefit amount is never taxed- the maximum taxable amount is 85%. That means that a portion of your social security will always be tax-free.
Who must Pay Taxes on Social Security?
To determine the taxability of your Social Security benefits, you must look at both your filing status and your “combined income.” Combined income is a unique income calculation and is different than Adjusted Gross Income (AGI) or Taxable Income.
Adjusted Gross Income
+ Nontaxable Interest (Muni Bonds)
+ ½ Social Security Income
= Combined Income
In January you will receive a statement from the Social Security Administration (SAA-1099) that will have the amount you received in benefits the previous year which will help you figure out if you owe taxes on the benefits you received.
The following table shows what percentage of your social security benefits will be taxed based on your filing status and your combined income.
For single taxpayers, anyone with a “combined income” over $25,000 will owe some amount of federal taxes. If your combined income is between $25,000-$34,000 you will pay taxes on 50% of your social security and those with income over $34,000 will have to pay taxes on 85% of their benefit.
If your filing status is Married Filing Jointly (MFJ), you will not owe taxes on social security if your combined income is below $32,000. Couples will owe taxes on 50% of their benefits if their combined income is between $32,000-$44,000 and will owe taxes on 85% with combined income over $44,000.
What about State Taxes?
Most states do not tax Social Security at all. There are 13 states that tax Social Security, but they do vary on how they handle it. The 13 states are: CO, CT, KS, MN, MO, MT, NE, NM, ND, RI, UT, VT & WV. How each state handles social security taxation is different, so be sure to do additional research if you live in one of these states or plan on retiring to one of them. We can also assist clients with this!
It is possible to have taxes withheld from your Social Security benefit. This can be helpful to avoid owing a large amount at tax time. You must mail or fax Form W-4V to your local Social Security office. This is only for federal income tax and you can only choose to withhold 7%, 10%, 12%, or 22%.