During your working days, you pay Social Security tax in the form of FICA/Medicare payroll tax withholding from your salary (or, if self-employed, is paid as self-employment tax on your 1040). Many folks are surprised that when you start receiving Social Security benefits, that some of these payments may also be taxed (hey, this seems like double taxation).

Are my social security benefits taxable?

If you’re getting close to retirement age, you may be wondering if your benefits are going to be taxed. And if so, how much will you have to pay? The answer depends on your other income. If your benefits are taxed, between 50% and 85% of your payments will be hit with federal income tax. There could also be state income tax considerations although many states, including Wisconsin, do not tax your social security income.

Important: This doesn’t mean you pay 50% to 85% of your benefits back to the government in taxes. It means that you have to include 50% to 85% of them in your income subject to your regular tax rates.

According to the IRS, the quick way to see if you will pay taxes on your Social Security income is to take one half of your Social Security benefits and add that amount to all your other income, including tax-exempt interest. This number is known as your combined income (combined income = adjusted gross income + nontaxable interest + half of your Social Security benefits).

If your combined income is above a certain limit (the IRS calls this limit the base amount), you will need to pay at least some tax.

The limit is $25,000 if you are a single filer, head of household or qualifying widow or widower with a dependent child. The limit for joint filers is $32,000. If you are married filing separately, you will likely have to pay taxes on your Social Security income.

Caution: If you aren’t paying tax on your Social Security benefits now because your income is below the floor, or you’re paying tax on only 50% of those benefits, an unplanned increase in your income can have a significant tax cost. You’ll have to pay tax on the additional income, you’ll also have to pay tax on (or on more of) your Social Security benefits, and you may get pushed into a higher tax bracket.

For example, this might happen if you receive a large retirement plan distribution during the year or you receive large capital gains. With careful planning, you might be able to avoid this tax result.

Be prepared for the tax due on Social Security.

If you know your Social Security benefits will be taxed, you may want to voluntarily arrange to have tax withheld from these benefits payments by filing a Form W-4V with your local Social Security Administration Office. The form allows you to elect to have a flat federal tax withholding at a rate of 7%, 10%, 12% or 22%. Otherwise, you could increase federal withholdings on other sources of retirement income (from 401K, pension or IRA’s). Some people choose to make quarterly estimated tax payments on the taxable portion of social security benefits.

Contact us to help you with the exact calculations on whether your Social Security will be taxed. We can also help you with tax planning to keep your taxes as low as possible during retirement.