Taxing Social Security varies according to state laws. Working with a reliable and experienced financial advisor like Credo Team is essential to help you better understand how different sources of retirement income are taxed.
At the federal level, Social Security income is usually taxable even if the basis of the taxes that you have to pay (or not) on your Social Security is your income level. Expect that you have to pay income taxes on your Social Security benefits for your other sources of income like a part time job or a 401(k). In the event that you merely depend on your Social Security checks, then most likely, you won’t need to pay taxes on your benefits.
Is Your Social Security Income Taxable?
Based on the IRS rule, a simple way to check if you need to pay taxes on your Social Security income is to take 50% of your Social Security benefits and then add it to all your other income (taking account tax-exempt interest). This sum is called your combined income.
Combined Income = Adjusted Gross Income + Non-taxable Interest + half of your Social Security benefits
You would need to pay at least some tax if your combined income is above the IRS’ limit base amount. According to this, the limits are:
Single filer, head of household, qualifying widow, widower with a dependent child – $25,000
Joint filers – $32,000
Married (filing separately) – most probably, you will have to pay taxes on your Social Security income
How to Compute for Your Social Security Income Tax
The tax amount that you need to pay depends on your total combined retirement income (if your Social Security income is taxable). Nevertheless, you would not need to pay taxes on more than 85% of your Social Security income. According to the Social Security Administration, if you are a single filer and your total income is less than $25,000, there’s no need for you to pay taxes on your 2021 Social Security benefits. For 2022 filing (for 2021 tax year), tax computation would be:
- For single filers with a combined income of $25,000 – $34,000, the income taxes would be on up to 50% of the Social Security benefits. If the combined income was more than $34,000, taxes would be on up to 85% of the Social Security benefits.
- For married couples filing jointly, taxes would be on up to 50% of the Social Security income if the combined income is $32,000 – $44,000. A combined income of more than $44,000 would e taxable on up to 85% of the Social Security benefits.
If 50% of your Social Security benefits are taxable, the exact amount that you need to indicate in your taxable income (on your Form 1040) will be the lesser of any of the following: 50% of your annual Social Security benefits or 50% of the difference between your combined income and the IRS base amount.
Feel free to contact Credo for a better understanding on how to compute for your Social Security tax liability, the process of filing, and how to simplify your Social Security taxes.
Benefits and Impact of Roth IRAs
Saving in a Roth IRA is a good option if you are fretful about your income tax burden when you retire. This is because you save after-tax dollars with a Roth IRA (tax computation is based on the amount prior to contributing it to your Roth IRA so there would be no taxes incurred once you withdraw your contributions). Withdrawing funds after you retire is not dependent on any specific schedule which is different from the traditional IRAs and 401(k) plans (wherein you may only withdraw your retirement money by age 72 or 70.5 if born prior to July 1, 1949).
A Roth IRA is a good way to augment your retirement income without worrying about increased taxes in retirement because your Roth IRA withdrawals won’t be factored in as part of that income (when combining income for Social Security tax reasons).
Take note also that there are several retirement plans that allow individuals (aged 50 years of older) to make annual catch-up contributions (up to $1,000 allowed).
Social Security Benefits State Taxes
Aside from the federal income taxes (which were discussed previously), you may also need to pay state income taxes depending on the state where you live.
Everyone’s goal is to minimize the amount that we pay on taxes. The same goes with retirement when most have a set savings amount. But when you’re paying Social Security benefits taxes, it only means that your retirement income is sufficient and you have other income sources rather than merely relying on Social Security.
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