You've made it to retirement! You have now attained the age at which you are eligible to receive Social Security benefits. The going is smooth. The response is not as straightforward as a yes or a no. Various aspects of your circumstance will influence your total tax burden. There is a possibility that some or all of your Social Security income may be subject to taxation.
If Social Security Is Your Only Income
If Social Security payments are the sole source of income you get, there is a very good chance that you won't be required to pay income tax on those benefits. This indicates that your Social Security income is likely to be exempt from taxation if you have not made any contributions to a 401(k) plan, if you do not rent out a property for a profit, or if you have completely retired from the workforce. These are only a few examples; the main aspect is that you do not have any other revenue coming from any source. This may imply that you are exempt from having to submit a tax return in certain circumstances. If you are considering not submitting your taxes at all, you should consult with a tax expert first.
If You Have Other Income
Some of your Social Security benefits may be taxed if you receive income from other sources besides your Social Security payments. Fifty percent or eighty-five percent of your benefits will be subject to taxation. Which one it is will be determined by your other sources of income. Calculating the amount of your Social Security benefits subject to taxation may be done with the help of the Social Security Benefits Worksheet included in the instructions for Form 1040. To determine how much you owe in taxes, you must first compute your "combined income" and then examine that number concerning the standard deductions shown in the following chart. Your income from all other sources, including interest that is free from taxation and half of your Social Security payments, makes up your combined income.
An Example
Let's imagine that the revenue from your investments brings in $15,000 annually for you. You continue to work one day each week, and the income you received from doing so over the tax year comes to a total of $7,000. You retired and started collecting Social Security payments, which provided you with 18,000 dollars annually. It would cost $9,000 if we took half of it.
As a result, the sum of your income is $31,000 ($15,000 in income from investments, $7,000 in earnings, and $9,000 in Social Security payments). Due to $31,000 being more than the single-filer level of $25,000, you will be required to make a tax payment because of this situation. Then you do not have to pay taxes because the threshold is higher for married couples.
Additional Amount Thresholds
You may have noticed that the chart you just looked at has an extra column specifying the "additional amount." The additional amount denotes the threshold at which the greater level of tax obligation becomes applicable. The hypothetical situation with a combined income of $31,000 exceeds the base amount level for a person filing as a single person. However, it is not enough to exceed the extra amount requirement, which is now set at $34,000. In light of this, it follows that the amount of your Social Security income subject to taxation will be reduced to fifty percent.
Rules for Married Couples
When married couples file their taxes as a unit, they must meet income criteria of $32,000 for the basic amount and $44,000 for the extra amount. When it comes to married couples who file their taxes separately, everything hinges on whether or not they share any portion of the year in the same residence. Your base amount is reduced to zero if you and your spouse share a residence during the tax year. This applies even if you just temporarily shared a residence. There is a good chance that a part of your Social Security income will be subject to taxation.
State Taxes on Social Security
In addition to the District of Columbia, a little more than half of the states do not impose an income tax and do not include income from Social Security in their tax calculations.4 The remaining states may impose an income tax on Social Security income, but they do not all handle taxes similarly. Some of these states will impose taxes on benefits of up to 85%, which is the same as the federal government. Some states tax Social Security payments to a certain amount but provide exemptions according to the recipient's age and income level.
