Are you close to retirement? In planning for retirement, an important question to consider: Are my social security benefits going to be taxable? The short answer is, it depends. To determine what percentage of your benefits are taxable we need to take a closer look at your other income, including income of your spouse and also tax exempt interest income.
The general rule in is to add half of your social security benefits to your total income. The equation looks like this:
Combined Income = AGI + nontaxable interest + ½ social security benefits
Once you have come up with your “combined income” number, you need to apply the following rules depending on your filing status.
For single taxpayers the following rules apply
- Total income < $25,000, you pay $0 tax on your social security benefits
- Total income > $25,000 but < $34000, you pay tax on up to 50% of your social security benefits
- Total income is > $34,000, you can expect to pay taxes on up to 85% of your social security benefits
For married taxpayers
- Total income < $32,000, no tax is assessed to your social security benefits
- Total income > $32,000 & < $44,000, you will pay tax on up to 50% of your social security benefits
- Total income > $44,000, you can expect to pay taxes on up to 85% of your social security benefits
Another rule of thumb, you will never pay tax on more than 85% of your social security income.
Tax planning remains important in retirement
The affects a single IRA distribution can have could have major tax implications. Not only may you owe tax from the income from the distribution but it could move you into a higher tax bracket causing more tax to be owed. It could also affect your combined income calculation causing a higher percentage of your social security benefits to become taxable.
If it is determined that you will owe tax on your social security benefits, one way to help reduce your tax liability is to voluntarily withhold federal taxes on a portion on your benefits payments throughout the year. This is similar to the tax withholding you would have taken out of your paycheck each pay period. Complete Form W-4V and select the desired withholding (i.e., 7%, 10%, 12% or 22%). Give or send the completed Form W-4V to your local Social Security Administration office.
Our tax professionals here at Wegner CPAs would be happy to assist you with your retirement and tax planning needs.
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