Finding out your Social Security benefits may be taxable is a surprise to some taxpayers. The answer to the question if your benefits could be subject to tax is: “it depends”. The amount of benefits taxed is based on all your other income items.
If your total income is over certain amounts, up to 85% of SS benefits could be included in taxable income.
Figuring your income
The first step is to add up your other income items including wages, interest income, dividends, other retirement income, as well as certain nontaxable items such as tax-exempt interest. If filing a joint return, this number includes the income of both spouses. The second step is to add 50% of Social Security benefits.
If the combined income is below a prescribed threshold (the threshold varies based on filing status), then none of the benefits are taxable. If the combined income total is over the base amount, then a portion of the SS benefits will be subject to tax.
The base limit is $25,000 if you are a single filer, head of household. The base limit for joint filers is $32,000.
For married couples filing jointly, you will pay taxes on up to 50% of your Social Security income if you have a combined income of $32,000 to $44,000. NOTE: If you have a combined income of more than $44,000, you can expect to pay taxes on up to 85% of your Social Security benefits.
Planning and paying tax on Social Security
If you are not currently paying tax on Social Security because your income is below the low end of the above base limits, any significant increase in income can have a significant tax cost. First, the tax on the additional income, then the tax on Social Security now included (or included at a higher percentage), and potentially, the income could be pushed into a higher income tax bracket.
Tax planning can help avoid or lessen the tax impact. Ways to reduce current income include: spreading certain income over multiple years, such as by using an installment sale, or by planning the timing of capital gains from investment trades in taxable accounts; utilizing qualified charitable distributions (QCD) instead of recognizing taxable RMDs from a traditional IRA; and triggering capital losses on certain stocks to offset capital gains reported.
If income is going to be high enough whereby Social Security benefits will be taxed, federal income tax can be withheld by filing a W-4V form with your local SSA office. This avoids having to calculate and remember to make quarterly estimated tax payments.
States generally do not tax Social Security benefits, Wisconsin included. Some states do include benefits in taxable income, and the method varies by state. For example, Minnesota allows a subtraction from benefits included in federal taxable income, but only up to certain amounts based on filing status, and this is then reduced if income is over certain levels.
This can be complicated so please contact your Wegner tax advisor to assist with planning or questions related to your social security benefits.