Are Social Security Benefits Taxable? What to Watch Out For

Thanks to Devin Carroll, of SocialSecurityIntelligence.com , for his expertise and contribution to this article…

Are Social Security benefits taxable? You may be surprised to learn that the answer is yes. Most of us assume that Social Security is tax-free. After all, you’ve been putting money into the system over the course of your career. It is time for it to pay you. Unfortunately, this isn’t necessarily the case.

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In fact, according to a publication from the Social Security Administration, 52 percent of families receiving Social Security benefits paid income tax on their benefits in 2015.

There are many reasons to love Social Security, and even though the taxability of Social Security income isn’t one of them, it’s worth understanding how Social Security income is taxed so you can stay out of trouble with the I.R.S.

Let’s take a look at the taxability of Social Security income at the federal level and the state level. After that, we’ll dive into a few practical ways you can help ensure you’re correctly paying taxes on your Social Security income. Finally, we’ll look at some important further considerations in retirement.

Are Social Security Benefits Taxable? Federal Taxes

You can read about federal income taxes and your Social Security benefits from the Social Security Administration’s website, but here are the general rules for you below.

Social Security may or may not be taxed at the federal level. It depends on your income.

Typically, you’re going to pay taxes on your Social Security income if you have a great deal of income other than from your Social Security benefits. This may include income such as:

  • Employment wages
  • Self-employment income
  • Interest
  • Dividends

Keep in mind that there are other types of taxable income too, and they would have to be figured into the equation.

Individual Returns

If you file as an individual and your 2015 combined income (your adjusted gross income + non-taxable interest + the appropriate percentage of your Social Security benefits) is between $25,000 and $34,000, you may have to pay income tax on up to 50% of your benefits. If your 2015 combined income is more than $34,000, you may have to pay income tax on up to 85% of your benefits.

Note: If you’re feeling slightly overwhelmed by this math, don’t worry, we’ll get to some practical steps to ensure you’re correctly paying taxes on your Social Security income a little later in the article.

Joint Returns

Now, if you file a joint return and you and your spouse have a 2015 combined income (see definition above) that is between $32,000 and $44,000, you may have to pay income tax on up to 50% of your benefits. If your 2015 combined income is more than $44,000, you may have to pay income tax on up to 85% of your benefits.

You may have noticed that the word “may” has been used a lot here. Don’t worry, there are ways to accurately calculate the taxability of your Social Security income – I’ll explain how in a moment.

Are Your Social Security Benefits Taxable? State Taxes

Okay, now that we have an overview of if your Social Security benefits are taxable at the federal level, let’s take a look at what happens at the state level.

As you may have guessed, methods vary how each state taxes its Social Security income. Some states tax just like the federal government, others have exceptions, and others don’t tax Social Security income at all.

According to Kiplinger, the 13 states that tax Social Security are Colorado, Connecticut, Kansas, Minnesota, Missouri, Montana, Nebraska, New Mexico, North Dakota, Rhode Island, Utah, Vermont and West Virginia.

One of the best ways to find out how your state taxes Social Security income is to contact the state government itself. Keep in mind that the way your state taxes Social Security income may change with time, so it’s best to stay up-to-date every year with the latest tax policy.

How to Ensure You’re Paying the Right Amount

If you’re thoroughly overwhelmed by the amount of research you feel is needed to correctly pay your Social Security income taxes on the federal and state levels, take heart. There’s good news . . . .

At the end of each year, if you’re receiving Social Security income, you’ll receive Form SSA-1099. This is the Social Security Benefit Statement. This statement will show a number of benefits you received in the previous year. There are two ways you can go about using this statement . . . .

One way is to use it yourself to complete your federal income tax return and find out if you owe taxes on your Social Security income – you can do the same for your state income tax return if applicable. Another way is to hand your SSA-1099 to a tax professional who can help you determine the taxability of your Social Security income at the federal and state levels. The choice is yours.

If you do find that you owe taxes on your Social Security income, there are two ways that you can pay these taxes at the federal level. One way is to make quarterly payments to the Internal Revenue Service. The other way – that would cut down on the paperwork – is to choose to have federal taxes withheld from your Social Security benefits.

Further Considerations in Retirement

Even if you find that you’re in a state that doesn’t tax Social Security income, that alone doesn’t mean your state is the best one for a healthy retirement. Retirees may pay taxes in a number of ways, including through sales tax and property taxes. Learn more about the best states for minimizing taxes in retirement.

If you’re a retiree or near retirement, it may be best to hire a financial professional who can help you determine the tax implications of living in a particular state and for information concerning your individual situation. You may find it beneficial to move to another state – hopefully near friends and family. Every tax is important to consider in retirement.

By paying attention to Social Security income taxes and the other factors that affect retirement, you can create a financial plan designed to last.

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