Is Social Security Income Taxable?

Back in 1935, President Roosevelt signed the Social Security Act into law. Initially, the benefits were designed to be received by the primary worker, but over time, benefits were extended to the worker’s spouse and children. The purpose of the act was to and still is to provide for the basic needs of aged or disabled persons from the expenses that they will incur after they no longer have the ability to work.

Calculating tax on Social Security Income

Today, over 63 million people are collecting Social Security benefits. Though the majority of benefits are received by older Americans, approximately one in five persons benefiting from social security income are receiving disability-related income or are the young survivors of a worker who is now deceased. And, over 169 million Americans are paying their social security taxes with the eventual intention of receiving those benefits at retirement or in the event of disability.

Though millions of Americans are paying or have paid social security taxes, the ramifications related to taxes are often misunderstood. All workers and taxpayers need to understand the social security income is taxable, but that taxation comes with imitations. Thus, understanding the tax implications will make the annual filing of federal and state tax returns much easier, and will help you to avoid paying tax penalties is when applicable.

If you are to file your federal tax return as an individual and if you have a combined income from all of your income sources that exceeds $25,000, you will be subject to paying income taxes on any social security benefits that you receive. Conversely, if you file a joint return and you have a total combined income of $32,000 or greater, you will also have to pay taxes on those social security earnings. Finally, when filing a separate tax return even though you are married, it is also highly likely that you will need to pay taxes on your social security income.

Calculating the Tax Income Limits for Social Security Income

The amount you will pay in taxes is highly dependent on your total combined retirement income. For the 2019 tax year, those filing singly with a combined income ranging from $25,000 to $34,000 will pay income taxes on up to 50% of their social security benefits. For married couples that are filing jointly, they will have to pay taxes of up to half of their combined income if it ranges between $32,000 to $44,000. And finally, for those with a combined income of over $44,000, they will pay taxes of up to 85% of their social security benefits.

According to the Internal Revenue Service (IRS), the current tax rate for social security is 6.2% for the employer as well as the employee (totaling 12.4%). Medicare tax is 1.45% for both employer and employee (totaling 2.90%).

Further, social security tax does have a wage base limit, which is the maximum wage that can be taxed within the given year. For those earnings that are applied to 2019, the limit is based on an income of $132,900. Medicare tax, however, does not have a wage base limit and as such, all applicable wages are subject to Medicare tax.

State Taxes for Social Security Benefits

Presently, there are 13 states that will tax you on your social security benefits. Those states include Colorado, Connecticut, Kansas, Minnesota, Missouri, Montana, Nebraska, New Mexico, North Dakota, Rhode Island, Utah, Vermont and West Virginia. To determine exactly how social security tax varies based on adjusted gross income and other variables, tax payers should check with their respective state tax agencies.

If you reside in one of the remaining 37 states that do not tax you on your social security income, it is important to note that you may still have to pay federal taxes based on your annual income. Other types of retirement benefits such as your 401(k), pensions, etc. are also subject to tax in certain situations, so be sure to check with your local state tax agencies for specifics on that as well.

Stress-Free Tax Filing Tips

It isn’t necessary to stress about the amount of taxes that you will pay based on your social security income. However, it is important to take steps to simplify the overall tax filing process. Consider the following suggestions to make your social security income tax payment process a bit easier.

  • Don’t wait until April of each year to pay your taxes. Instead, consider paying your taxes throughout the year by making payments based on quarterly estimates. You can also download the IRS Form W-4V which is a Voluntary Withholding Request form. By filing this form, you are asking the Social Security Administration to withhold taxes from your social security benefits.
  • Participate in a no-cost tax return preparation curriculum. The IRS has identified selected volunteers that can help you to file your taxes through the Volunteer Income Tax Assistance (VITA) or Tax Counseling for the Elderly (TCE) Programs. These programs are generally available for individuals who make less than $65,000 per year, have disabilities, or are limited English-speakers that require assistance in filing their taxes. TCE is available for taxpayers over the age of 60 that have questions about their pensions or have retirement related concerns. The IRS undergoes a process to certify selected volunteers who can provide tax-related counseling and assistance to those who qualify for these programs.
  • The gov website is also a great resource for those who have questions about their tax situation. The site provides a plethora of helpful information regarding tax filing as well as answers to common questions. For those who need it, they can also take advantage of the IRS’s Interactive Tax Assistant that can help to answer questions related to tax law.

When it comes to filing your taxes and understanding the nuances related to social security related tax implications, it is important to be diligent rather than leave things to chance. Ensure that you have taken the appropriate amount of time to prepare your taxes, and work with a tax professional if you have any questions or are concerned about your ability to complete an accurate tax return. Leveraging a certified public accountant (CPA) can be extremely helpful in ensuring that all tax laws have been addressed and that your tax return is accurate. Though the notion of taxes can feel scary and appear complicated, taking the time to understand your income and tax implications up front will help you to file a more complete and accurate return.

There is no doubt that filing your taxes can be a lengthy and laborious undertaking, especially when one needs to take social security income into consideration. Those who take the time to understand social security income and its relationship to tax laws at the federal and state level will have an advantage over those that do not, and will be far less likely to incur a costly filing mistake.