Points to know
Show Will you owe taxes on your Social Security benefits?As with most questions about taxes, the answer is "it depends." About 40% of people who get benefits pay income taxes on them, according to the Social Security Administration (SSA). That's because their income in retirement exceeds limits set by tax rules and regulations. Generally, if Social Security is your only retirement income, you won't have to pay taxes on it. But if you have at least moderate income, you'll most likely owe the government some money. The good news is that while up to 85% of your benefits may be taxed at ordinary income rates, it's never 100%. That's considered tax-efficient compared with other retirement plans whose distributions may be fully taxable. In addition to the federal tax bite, 13 states also tax Social Security benefits using either the federal provisional income formula or their own.
States that tax your Social Security incomeWhat's the provisional income formula?Whether you'll owe taxes on your benefits is based on a provisional income (PI) formula: your modified adjusted gross income (AGI) plus tax-exempt bond interest plus half of your Social Security benefits. Social Security income limits
FILING STATUS Single; head of household; qualifying widow/widower; married, filing separately (spouses lived apart for all of the tax year) PROVISIONAL INCOME THRESHOLD $0 to $25,000 >$25,000 >$34,000 % OF TAXABLE BENEFITS 0% Up to 50% Up to 85%
Married, filing jointly PROVISIONAL INCOME THRESHOLD $0 to $32,000 >$32,000 >$44,000 % OF TAXABLE BENEFITS 0% Up to 50% Up to 85%
Married, filing separately (spouses lived together at any time during the year) PROVISIONAL INCOME THRESHOLD $0 % OF TAXABLE BENEFITS Up to 85% How it worksThe amount of Social Security income that's taxable is the smallest of the following 3 calculations.
At the end of the year, Social Security will send you a statement of your benefits for you to use when completing your federal income tax return. Did you know?You can ask the government to withhold taxes from your benefit payment, although you're not required to do so. If you'll owe taxes, withholding has 2 advantages: You won't have to pay a lump sum at tax time, and you'll avoid a potential penalty for underpaying your taxes. You could also satisfy your tax bill by having taxes withheld from other income sources, such as IRAs, pensions, or annuities, or by making quarterly payments to the Internal Revenue Service (IRS). You may want to consult a tax advisor. Create a tax-efficient Social Security strategyYour decision about when to claim Social Security should include tax efficiency as a factor—that is, how much taxable income you retain after paying applicable income taxes. Generally, your Social Security income will have a more favorable tax treatment than retirement income from accounts such as traditional IRAs or 401(k)s. That's because you'll never pay taxes on 100% of your benefits, whereas you'll pay your ordinary tax rate on income from other retirement accounts unless you've selected a Roth IRA. Learn about traditional & Roth IRAs Taking tax efficiency into account can help you decide whether it's advantageous to delay claiming Social Security benefits and determine the best way to tap into your sources of income to meet your cash flow needs in retirement. Managing how much of your income comes from Social Security versus other sources can make a big difference in your ability to support your long-term retirement plan. Consider these strategies |