Everything You Need to Know About Taxes and Social Security

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Since Social Security checks are a federal government benefit, it seems odd that you'd have to pay taxes on this income. But the fact of the matter is that some people do owe taxes on Social Security.

The good news is that if you're living off of Social Security retirement benefits and not much else, you won't likely 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 your Social Security income.

There's a ceiling here, though. You can't be required to pay taxes on more than 85% of your total Social Security income for the year. So no matter how much money you make otherwise, at least 15% of your Social Security income is tax-free.

How much of that 85% of your income you'll pay taxes on depends on how much your combined income is for a year. The current rules operate off the concept of "combined income," which is actually not as straightforward as it sounds.

For IRS purposes, your "combined income" when using Social Security benefits is equal to your adjusted gross income plus any nontaxable interest plus ½ of your Social Security benefits. So if your AGI from a part-time side job is $10,000 in a year, you earn no nontaxable interest, and your Social Security benefits total to $16,020, your combined income is actually $18,010.

So what are the rules for taxing Social Security income? They're as follows:

  • Individual filers with a combined income of between $25,000 and $34,000 will pay income tax on up to 50% of benefits.
  • Individual filers with a combined income of more than $34,000 will pay income tax on up to 85% of benefits.
  • Married filers filing jointly with a combined income (including both spouses) of between $32,000 and $44,000 will pay tax on up to 50% of benefits.
  • Married filers filing jointly with a combined income of more than $44,000 will pay taxes on up to 85% of benefits.
  • Married filers filing separately will most likely pay taxes on their benefits.

How to Pay Your Taxes

If there's a good chance you'll earn enough money in 2016 to pay taxes on some of your Social Security benefits, how do you ensure those taxes get paid? You've got two options. One is to have taxes withheld from your benefits as they come in each month.

You can have the Social Security Administration withhold taxes when you apply for benefits originally. 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 just not sure how much you'll 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'll likely need to pay taxes on your Social Security benefits. 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 benefits is an important piece of the puzzle when deciding whether to continue working while you draw on these benefits.

You should take time to understand how much you'll pay in taxes before deciding to continue running your business or working part-time. This calculator is one good option for figuring it out. In addition, tax preparation software will walk you through how much tax you'll owe, if any, on your social security retirement benefits.

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