It’s like listening to your know-it-all brother-in-law bragging about how much he’s made on a stock when you know full well that his financial situation is bad. Some people do have to pay taxes on their Social Security benefits. But some, as reported in the Tyler Morning Telegraph’s news story “Plan Retirement Right: Social Security and Income Taxes,” don’t.
Seems counter-intuitive. After all, didn’t you work all those years and weren’t those benefits supposed to be yours, tax free? The Internal Revenue Service determines who has to pay income tax on Social Security benefits and they do so using a number known as “Combined Income.” That’s a number unique to you and your spouse that determines whether a portion of those benefits are taxable. It’s not the same as another IRS number you may know all too well—your AGI or Adjusted Gross Income.
Here’s how you calculate it:
Adjusted Gross Income + Nontaxable Interest + HALF of your benefits = Combined Income.
You’ll also need to consider a few situations where you may end up owing taxes on some portion of your Social Security benefits:
- If you file taxes as an Individual and your combined income is anywhere from $25K up to $34K, you might owe taxes on as much as half of your benefits.
- Or, if you file taxes as an individual and your combined income is over $34K, you may owe as much as up to 85% of your Social Security benefits.
Joint filers, “married, joint,” may owe taxes, if the combined income for you and your spouse is anywhere from $32K to $44. You may owe taxes on up to 50% on your Social Security. If the Combined Income for you and your spouse is more than $44K, you may owe taxes on up to 85% of your Social Security benefits.
Even if you file taxes “married, separate,” the IRS says it’s likely that you’ll be paying taxes on benefits.
Here’s how to handle this unwelcome tax burden:
Estimated Tax Payments. If you’ve been self-employed, you may be accustomed to doing this every quarter. You’ll have to be disciplined to make sure to set aside funds and pay on time.
Withholding. Some people have Social Security withhold the portion of the amount they would otherwise have to pay taxes on. This works well for people who have been employed and are used to having someone else manage their deductions. You’ll need to use IRS Form W4-V and select from a few different levels of deductions: 7%, 10%, 12% or 22%.
For more information about estate planning in Orlando, FL (and throughout the rest of Central Florida), visit our estate planning website and be sure to subscribe to our complimentary estate planning e-newsletter while you are there.
Reference: Tyler Morning Telegraph (Dec. 26, 2018) “Plan Retirement Right: Social Security and Income Taxes”