Are Your Social Security Benefits Taxable?

Let’s talk for a moment about an issue that affects more than 64 million Americans: whether Social Security benefits are taxable.

With so many people receiving retirement, survivor and disability benefits, you’d think it would be common knowledge whether Social Security is taxable. And yet, it trips up people year after year.

That’s because this is not a question with a yes-or-no answer. With the final countdown for filing 2014 taxes upon us, let’s put the issue to rest for those who still aren’t sure.

How to determine if you need to pay

I wish I could give you a quick and easy answer, but there are rarely quick and easy answers when it comes to things created by Congress and administered by the Internal Revenue Service.

Instead of making Social Security benefits taxable or not taxable, they’ve created a system in which a portion of your benefits may be taxable if you earn a certain amount of money.

It’s a bit convoluted, but try to follow along. To determine if any of your benefits are taxable, you need to add 50 percent of your Social Security benefits to your adjusted gross income plus any nontaxable interest you may have. The total is what is known as your combined income.

Here’s an example:

Assume your annual Social Security benefits are $20,000, and you work a part-time job where you earned $12,000 last year. You have no other income or interest. Add half your benefits ($10,000) to your part-time income ($12,000) for a combined income of $22,000.

Once you know your combined income, you need to compare it to these base amounts. The categories represent your tax filing status.

• $25,000 for single, head of household and qualifying widow(er)s
• $25,000 for individuals married, filing separately and living apart from their spouse for the entire year
• $32,000 for married couples filing jointly
• $0 for individuals married, filing separately but living with their spouse

If your combined income falls below these amounts, hurray! You don’t have to pay taxes on your Social Security benefits. If you’re above the base amount, move on to the next section to find out how much you’ll need to pay.

As a final note on the math, married couples must calculate their combined income with their joint income and both spouses’ Social Security benefits.

How much you’ll owe the taxman

If your combined income exceeds the base amount, you’ll pay taxes on up to 50 to 85 percent of your Social Security benefits.

According to the IRS, the amount you pay depends on where your combined income falls under these guidelines:

• Individual filers will pay tax on up to 50 percent of their Social Security benefits should their combined income be between $25,000 and $34,000. Those with a combined income greater than $34,000 may pay taxes on up to 85 percent of their benefits.
• Married filers with joint returns will pay tax on up to 50 percent of their Social Security benefits should their combined income be between $32,000 and $44,000. Those with a combined income greater than $44,000 may pay taxes on up to 85 percent of their benefits.

Note that those numbers are “up to” 50 percent and 85 percent. The actual percentage you’ll pay depends upon a complex worksheet the IRS has you fill out, or you could use tax preparation software and let it do the math calculations for you.

In addition to federal taxes, don’t forget that you may have pay to state taxes on your Social Security benefits as well. The Retirement Living Information Center has compiled state tax information on their site. From their page, click on your state and then look for the section on retirement income taxes.

Notes on SSI and children’s benefits

Finally, let’s touch base on two additional topics related to Social Security.

First is Supplemental Security Income, otherwise known as SSI. Some individuals receiving Social Security benefits also receive SSI. If you’re one of those people and are wondering if these payments are taxable, you’re in luck. There is a simple answer to this question. SSI is not taxable income.

The other related topic involves Social Security payments issued to parent payees on behalf of their children. Parents may wonder if they need to claim this income on their tax return. The answer is no. These benefits are the child’s income, not yours.

Of course, all of this information comes with the caveat that I am not a CPA, tax preparer or financial adviser. I am a personal finance writer. While everything in this article is accurate to the best of my knowledge, I encourage you to seek the help of a professional if you have questions or need further clarification about your situation.

What lessons have you learned about filing taxes after retirement? Share with us in the comments section below or on our Facebook page.