Social Security checks are a federal government benefit, but that doesn’t mean this income is tax free. Some people need to pay taxes on their Social Security benefit.
If you’re living off of Social Security retirement benefits and not much else, you probably won’t have to pay taxes on this income. However, if you have income from wages, self-employment, interest, dividends or other taxable income in a given year, you may need to pay taxes on both that income and part of your Social Security income.
The good news is that there’s a tax ceiling. You won’t be required to pay taxes on more than 85 percent of your total Social Security income each year. So no matter how much money you make otherwise, at least 15 percent of your Social Security income is tax-free.
How much of your Social Security income is taxable depends on how much your combined income is for a year. For IRS purposes, your “combined income” is equal to the sum of your adjusted gross income, nontaxable interest and half of your Social Security benefit. So if your AGI from a part-time job is $10,000 in a year, you earn no nontaxable interest and your Social Security benefit totals $16,020, your combined income is $18,010.
Your combined income is used to determine how much of your Social Security benefit will be taxable.
— Individual filers with a combined income of between $25,000 and $34,000 pay income tax on up to 50 percent of their Social Security benefit.
— Individuals with a combined income of more than $34,000 owe income tax on up to 85 percent of their Social Security payments.
— Married couples filing jointly with a combined income (including both spouses) of between $32,000 and $44,000 pay tax on up to 50 percent of their benefit.
— Couples with a combined income of more than $44,000 pay taxes on up to 85 percent of their Social Security checks.
How to pay your Social Security taxes. If there’s a good chance you will earn enough money in 2016 to pay taxes on part of your Social Security benefit, there are a couple of different ways you can ensure those taxes get paid. You could have the taxes withheld from your payments as they come in each month. You can ask the Social Security Administration to withhold taxes when you apply for benefits. If you’re already receiving benefits and want to change your withholding situation, fill out IRS form W-4V to have the SSA start withholding taxes from your monthly checks.
The other option is to pay quarterly estimated taxes. This is similar to paying quarterly estimated taxes on your self-employment income. If your income during the year is variable, or you’re not sure how much you will make, quarterly estimates might be a better bet for you. Each quarter you can look at how much you made in combined income, and figure out if you will need to pay taxes on your Social Security benefit. When you file your taxes for the year, you can get a credit for any over-payment, or catch up if you underestimated.
Making decisions. Understanding how your overall income affects taxes owed on your Social Security payments is an important piece of the puzzle when deciding whether to work and draw on benefits at the same time. You should take time to understand how much you’ll pay in taxes before deciding to claim Social Security and continue running your business or working part-time.
For example, let’s say you’re married filing jointly and you and your spouse fall into the 15 percent marginal tax bracket. You make a combined $30,000 in wages in 2016. If your Social Security benefit is around the average of $16,000, you’ll pay income tax on half of your benefit, or $8,000. However, if you and your spouse have a combined income of more than $44,000 for 2016, up to 85 percent of your Social Security benefit will be subject to income tax.
Earning extra money in retirement is often well worth your time and effort, especially if you enjoy the work you’re doing. Plus, working longer can keep your 401(k), IRA and other retirement savings options built up, letting you use that money later on in retirement. However, if you want to prevent your Social Security income from being taxed, you need to keep your combined income below the taxable thresholds.
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Everything You Need to Know About Paying Taxes on Social Security originally appeared on usnews.com
