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How Social Security Income Is Taxed

Posted by Admin Posted on Feb 03 2016

Many retirees who begin collecting Social Security are caught off guard when it comes time to file their taxes, and they find themselves owing far more than they expected. This is because the rate at which your Social Security income is taxed varies depending on your combined income, since taxes are not automatically taken out of Social Security distributions upfront, they often must be accounted for when you file your taxes in April.

At The Jones CPA Group, we want you to be aware of what the different tax rates are so that you’re not blindsided by the amount you may owe. There are also certain steps you can take to help minimize the amount you’ll owe in taxes, and we’d like to offer some basic advice on how to do so. While the following applies to most people, it doesn’t apply to all. If you are planning to retire in the near future, call or stop by our CPA firm in Orem and we’ll give specific guidance on how to minimize the taxes from Social Security benefits.

Tax Rates for Individuals

For Social Security recipients filing individually, the tax rates are as follows:

  • If your combined income is below $25,000, then your Social Security benefits will not be taxed at all.
  • If your combined income falls between $25,000 and $34,000, as much as 50% of your Social Security benefits may be taxed.
  • If your combined income is above $34,000, up to 85% of your benefits may be subject to tax.

“Combined income” refers to your adjusted gross income and nontaxable interest, plus half of your Social Security income.

Tax Rates for Couples

If you file as a couple, then the following tax rates will be applied to your Social Security income:

  • If the combined income of you and your spouse is below $32,000, then your benefits are not considered taxable income.
  • If you and your spouse report a combined income between $32,000 and $44,000, up to 50% of your Social Security benefits may be subject to tax.
  • If your combined household income is more than $44,000, then as much as 85% of your Social Security income may be taxed.

“Combined income” refers to the combined adjusted gross income of you and your spouse, plus nontaxable interest, and half of your Social Security income.

Minimizing Taxes Owed

Many people on Social Security income find themselves owing a large lump sum when they file their taxes in April, and this can be difficult to pay on a fixed income. Luckily, there are a few ways that you can minimize the amount that you owe on your taxes.

Voluntary Withholdings

The first way to minimize the amount you owe in April is to request voluntary withholdings from your Social Security benefits. You can do so by either calling Social Security and requesting IRS Form W-4V, or by finding the form online on the IRS website. You can choose what percentage of your benefits you would like to have withheld every month—7%, 10%, 15%, or 25%. Having this amount withheld every month can significantly reduce the amount you owe when filing taxes, making it easier to pay.

Draw Down Other Accounts

Another way to reduce your taxes on Social Security is to first draw down your 401k and IRA balances. This means not signing up for Social Security benefits on the day you retire, but utilizing other retirement accounts as your primary means of income first.

Keep Income below the Threshold

Now that you know the thresholds for different tax brackets, you can monitor your income throughout the year and ensure that it does not rise above your desired bracket. This will take some careful monitoring and planning on your part, but with a little help from our financial professionals, it’s certainly manageable. It also helps to know what other sources of income you have that are taxable; for example, withdrawals from a Roth IRA do not make your benefits taxable, so you could use this account to supplement your income when needed without risking a higher tax rate.

A Note on State Taxes

It’s important to note that the tax thresholds listed above only apply to federal taxes on Social Security benefits. Roughly half of the states in the country also tax Social Security income, including Utah. The rate at which you are taxed can vary greatly from state to state, so it’s important to know and plan for those taxes.

For more help on tax filings, financial planning, and more, speak to one of our certified CPAs at The Jones CPA Group in Orem, Utah.