Retirement is full of surprises, especially at tax time.
Some new retirees are surprised to learn that Social Security benefits can be taxable, for example. Others are surprised to learn that Social Security income taxes can hit married couples harder than single retirees.
As Curtis M. asks Money Talks News:
“For a single person, you can have an income of up to $25,000 before paying taxes on your Social Security. However, a married couple starts paying at $32,000. It seems like you could get a divorce and up your combined limit of income to $50,000 before you are taxed on SS. Am I missing something?”
No, Curtis, you aren’t missing a thing. There is indeed marriage tax penalty on Social Security income.
Essentially, a marriage tax penalty, also known as a marriage penalty, is when a provision of tax law is less advantageous for couples filing joint returns than it is for taxpayers filing individual returns. It can result in a couple collectively owing more taxes (or receiving a smaller refund) if they filed jointly than they would if the same two people filed separately.
The good news is that there’s a perfectly legal way for couples to mitigate marriage penalties.
Let’s take a closer look at how Social Security benefits are taxed and what folks can do about those taxes and associated penalties.
How Social Security benefits are taxed
Not all retirees owe federal income taxes on their Social Security benefits. Around 40% do, according to the Social Security Administration.
Whether your benefits are federally taxable depends on your federal tax-filing status and what the government calls your combined income.
To determine your combined income, add up three things, all of which you can find on your federal tax return:
- Your adjusted gross income
- Your income from tax-exempt interest, such as interest you earned on government bonds
- Half of your income from Social Security benefits
If your tax-filing status is single, head of household, surviving spouse or married filing separately and your combined income is:
- Between $25,000 and $34,000: You might owe taxes on up to 50% of your Social Security benefits.
- More than $34,000: You might owe on up to 85% of your benefits.
If your tax-filing status is married filing jointly and your combined income is:
- Between $32,000 and $44,000: You might owe taxes on up to 50% of your benefits.
- More than $44,000: You might owe on up to 85% of your benefits.
If you’re already receiving Social Security, there’s no need to do all this math: Simply check your latest federal tax return. The first page will tell you how much you received in benefits (listed as “Social Security benefits”) and, to the right of it, how much of your benefits were taxable (listed as “Taxable amount”).
How to minimize Social Security taxes (and related fines)
Technically, there is a lot retirees can do to dodge or decrease taxes on their Social Security income. We’ve got a rundown in “7 Ways To Avoid Paying Taxes on Your Social Security Income.”
It helps to plan ahead, though, instead of waiting until after you’ve started receiving benefits to start worrying about taxes on them. At that point, you will have fewer options.
Here’s another thing to plan ahead for: the fine for overdue taxes on Social Security income.
If it turns out that a portion of your benefits are taxable but you don’t have taxes withheld from your Social Security payments or other income, you might face this fine when you file your return. It’s easy to avoid this penalty, though.
If you expect to owe taxes on your benefits — or if you simply want to be safe — you can ask the Social Security Administration to withhold taxes from your payments throughout the year. Just fill out Form W-4V: Voluntary Withholding Request and submit it to your local Social Security office.
How to mitigate a marriage penalty
There’s a way for couples to avoid getting dinged by a marriage penalty at tax time, too: They can prepare their return twice. Use the tax-filing status of married filing jointly the first time and married filing separately the second time.
That way, a couple can determine which filing status would result in a smaller tax bill (or larger refund), and then submit the return with the more beneficial status.
This is perfectly legal. In fact, the IRS encourages it. In Publication 501, the agency writes:
“If more than one filing status applies to you, choose the one that will give you the lowest tax.”
Just don’t be surprised if married filing jointly results in a better bottom line, even with the marriage penalty on Social Security income.
Federal income tax law has multiple marriage penalties — and marriage bonuses, which are provisions that favor couples filing jointly. But overall, tax law favors couples who file joint returns.
That’s why the vast majority of couples file together. (The IRS received only about 3.9 million returns with the married filing separately status for the 2021 tax year.)
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