How Uncle Sam Taxes Your Social Security Benefits
Will My Social Security Benefits be Taxable?
Most likely, yes, if you have substantial income in addition to your social security benefits.
Before I go any further, let me get some legal info out of the way. I am not a tax professional. This document is not intended as legal, accounting, or tax advice and only for informational purposes. I HIGHLY recommend you consult with your tax professional for how taxes will pertain to your exact situation.
According to AARP, the Social Security Administration estimates that approximately 56% of social security recipients benefits are taxable.
To understand how the taxes work, we need to understand the definition of combined income;
Your adjusted gross income
+Nontaxable interest
+1/2 of your social security benefits
=Your “Combined Income”
File a federal tax return as an “individual,” and your combined income is
Between $25,000 and $34,000, you may have to pay income tax on up to 50% of your benefits.
More than $34,000, up to 85% of your benefits may be taxable.
File a “joint” return with your spouse, and your combined income is
Between $32,000 and $44,000, you may have to pay income tax on up to 50% of your benefits.
More than $44,000, up to 85% of your benefits may be taxable.
Married and File a Separate Tax Return
You probably will pay taxes on your benefits.
Case Study from IRS Publication 915
- George White is single and files Form 1040 for 2021.
- In addition to receiving social security payments, he received a fully taxable pension of $18,600, wages from a part-time job of $9,400, and taxable interest income of $990, for a total of $28,990.
- He received a Form SSA-1099 in January 2022 that shows his net social security benefits
- of $5,980 in box 5.
- To figure his taxable benefits, George completes Worksheet 1, shown below. On line 6a of his Form 1040, George enters his net benefits of $5,980. On line 6b, he enters his taxable benefits of $2,990.
If I Owe Taxes, How Do I Pay Them?
There are two ways to pay taxes. First, you can ask the Social Security Administration to withhold taxes from your benefit payments each month.
You can set up the withholding when you are applying for your benefits. If you already receive payments and want to start withholding or change the percentage, you can fill out IRS tax form W-4V.
The second is sending in quarterly estimated tax payments. Your tax professional will run an estimate on your income, project your tax liability, and divide the number into 4 payments.
In Closing
The taxation of benefits often plays a role in deciding when to file for benefits. Sometimes because of other income sources, it makes sense to delay benefits until age 70.
I highly recommend looking at all aspects before filing or choosing a tax strategy. For more information on knowing when to file, check out my article Why Knowing When to File for Social Security is Difficult — Really Difficult.
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