Surprise, your Social Security benefits are taxable benefits!
Retirees are often surprised that their Social Security benefits are taxed. The tax is most often encountered by retirees with higher incomes. However the proportion of Social Security recipients who owe taxes has been rising.
Have Social Security payments always been taxed?
We must go back to 1983 when Social Security reforms were put into place by Congress. This was an attempt to stabilize the program. The revenue from Social Security taxes is sent to the Social Security Trust Fund which is responsible for paying out future benefits.
The taxes paid by higher earning individuals was implemented in 1994 and that revenue is used to shore up the Medicare Part A trust fund.
Initially, only 7.4% of Social Security beneficiaries paid taxes on benefits. However that figure is up to about half of beneficiaries and rising.
Who pays taxes on Social Security Benefits?
For the sake of simplicity, you need to come up with your “combined income”. This is your adjusted gross income + nontaxable interest + 50% of your Social Security benefit. Depending upon your “combined income”, the percentage of your Social Security benefits that are to be taxed range from 0% to 85%.
The wonderful folks at the IRS have a calculator that you can use to determine if any part of your benefits are taxable.
How can you pay the Social Security tax?
There are two methods to paying what you owe:
- Have the Social Security taxes withheld from your benefits,
- Make estimated quarterly tax payments through the year just as you would with any income that has not had taxes withheld.
Look for IRS Form SSA-1099 in the mail from the IRS during tax season. You will also want to determine whether your state exempts Social Security income.
How Social Security taxes fit in a retirement plan.
- Taxes on what you withdraw from your IRA, 401(k), etc.
- Taxes on required minimum distributions.
- Surcharges on Part B and Part D Medicare premiums.
Do your homework.
Careful planning may help reduce your tax burden while in retirement. These may include qualified charitable distributions, Roth conversions.
You will most likely not be able to totally avoid taxes on your Social Security benefits, but you can be proactive with this subject.
Can we help you?
Proper retirement and financial planning can help reduce taxes in general if you are proactive. Retirement Solutions has been helping women with these issues for decades and have the expertise and tools to guide you.
We offer a no-obligation, no-cost, 15-minute consultation to determine whether you need our services and whether we can assist you. We invite you to take advantage of this opportunity by clicking the “Schedule a Consultation” link in the upper right hand corner of this page. You talk, we listen, nothing more, we promise!