We’re in the last leg of the regular tax season here. My office has been working overtime (often literally) cranking out returns for our Castle Rock clients. If you haven’t touched base with us yet, and still need to process and file your paperwork, things will be a little trickier… but not impossible.
So, reach out ASAP so we can start working on it: calendly.com/davidforney
And I want to revisit something we discussed recently: tax planning. If there’s something I could really stress right now, it’s sitting down and looking at your tax liability and planning well for it.
Coming in hot to tax season with tax liability like a fire on your heels can mean frantically throwing things together to deal with it. Not ideal.
But it doesn’t have to go down like that.
In fact, I would challenge you today to make sure it’s not that way. Start looking ahead. In inflationary times, in good deals times, in abundance, in lack, in whatever time: make a plan.
That includes thinking about big life changes that might be on the horizon. One that I’ve repeatedly found people unsure about and falling on the wrong side of is retirement taxation — which means you’ve got to plan well for it. I’m not just talking about everything you shored up in an IRA or 401k but also the part you get from Uncle Sam (aka Social Security benefits).
Now, not everyone gets taxed on their benefits. There are certain parameters to it. Knowing what those are and how you can plan for them (or if you even need to) is our topic for today.
Let’s dive in.
Do All Castle Rock People Pay Taxes on Social Security Benefits?
“Unjust and stupidly drafted.” – Presidential candidate Alf Landon on The Social Security Act, 1936
Social Security is one of the three legs — with individual retirement accounts and pensions (if you’re lucky enough to have one) being the other two — that most people rely on in their golden years. That’s great, but you might be wondering if you’ll pay taxes on your Social Security benefits when you start receiving them.
Well, the quick answer is: You could.
In fact, more than half of those receiving Social Security benefits owe taxes on them. But when does that happen and why?
Whether you’re retired (and maybe working part-time) or planning ahead for your finances after you stop working full-time, let’s see what’s in store for you with the IRS.
The math
“Social Security benefits” include monthly retirement, survivor, and disability benefits. They do not include supplemental security income (SSI) payments — those monthly payments to adults and children with a disability or blindness who have income and resources that fall below specific financial limits.
SSI is not taxable. Generally, if all your income is from Social Security benefits, this also isn’t taxable.
If you got Social Security benefits plus other income, you can find out how much is taxable in the worksheet in the IRS Form 1040 (your personal tax return) instruction book.
You must pay federal income taxes on your Social Security benefits (several states tax Social Security, too — check with us) if you have other income in addition to your benefits. This includes wages, self-employment or gig income, interest, dividends, and other taxable income that you put down on your 1040.
Here’s the good news: You’ll pay federal tax on only 85% max of your Social Security benefits, based on IRS rules. Exactly what the percentage is depends on the status you use to file your taxes and how much you make a year.
Let’s start at the beginning: If you do get Social Security benefits, you’ll get a Social Security Benefit Statement each January (Form SSA-1099) that will show what you got in benefits the year before. (If you are a nonresident alien and you received or repaid Social Security benefits last year, they’ll send a Form SSA-1042S.) You use this form when you complete your federal income tax return to find out if your benefits are taxed.
One of the figures you use to calculate your taxes is your gross income (all the money you got through the year that’s taxable). This includes goods, property, and services that aren’t exempt from tax, which also means any income from sources outside the United States or from the sale of your main home.
Pay attention to the base amount of taxable income (combined income, aka half of your benefit amount plus any other earned taxable income) for your filing status:
- 25,000 dollars if you file Single, Head of Household, or are a qualifying surviving spouse — or if you file Married Filing Separately and lived apart from your spouse for the entire year.
- 32,000 dollars if you file Married Filing Jointly.
- 0 dollars if you file MFS and live with your spouse at any time during the tax year.
The taxes
The portion of your benefits subject to taxes varies with your income. You’ll be taxed on up to half your benefits if your income is 25 grand to 34 grand for an individual or 32 grand to 44 grand for a married couple filing jointly. You’ll be taxed on up to 85% of your benefits if your income is more than 34,000 dollars (individual) or 44,000 dollars (couple).
AARP gives a good example. Let’s say you file as Single and have 50 grand in income and get 1,500 dollars monthly in Social Security. You have to pay federal taxes on 85% of your annual benefits: 15,300 bucks in taxes.
(Look into setting up an online Social Security account. With one, you can get a replacement SSA-1099 or SSA-1042S or Social Security card, as well as estimate your future benefits or manage benefits you already get.)
If you do have to pay taxes on your benefits, you can make quarterly estimated tax payments to the IRS or get federal taxes withheld from your benefits. We can help you decide which is better.
Survivor benefits
Retirees aren’t the only ones getting Social Security. If your child gets Social Security dependent or survivor benefits, those payments do not count toward your taxable income. That money is taxable, though, if the child has enough income from Social Security and other sources to file a tax return in their own name.
If you and your child get benefits, you want to figure out your tax on Social Security benefits separately from your child.
We’re always here to help our Castle Rock clients figure these things out and answer questions about taxes and income. Never hesitate to reach out if that’s you.
All the best,
David Forney