A lot of people don’t take into account how much tax they will have to pay and how that will affect their benefits when they figure out how much money they will have in retirement. While most states don’t tax Social Security benefits, the federal government isn’t always so kind. There are times when your benefits may be taxed.
People who make more than a certain amount of money could have up to 50% of their benefits taxed. People who make even more money could have up to 85% of their benefits taxed. This won’t affect most people who get Social Security benefits, but some people should know about it.
Determining the Taxable Amount of Social Security
The Internal Revenue Service (IRS) uses something called “combined income” to figure out if and how much of your benefits will be taxed. This is the sum of your adjusted gross income (AGI), interest that is not taxed, and half of your Social Security benefits.
AGI is all of your income, minus the tax breaks the IRS lets you claim. It includes wages, salaries, dividends, capital gains, business income, and other income. Interest on things like bonds that isn’t taxed has to be included because they are resources that you can use, even if they aren’t taxed directly.
After figuring out the total amount, you will need to compare it to the IRS income limits to see if your Social Security benefits are taxed. These limits are meant to keep retirees with lower incomes from having to pay taxes on their benefits. They are changed (though not as often as they should be) to make sure that only the wealthiest retirees have to pay taxes on their benefits. These are the thresholds:
- Single filers: $25,000 and $34,000
- Married filing jointly: $32,000 and $44,000
- Married filing separately: $0 (if you lived with your spouse at any time during the year)
Other types of filers, like head of household or qualifying widow(er), usually have to meet the same requirements as single filers.
You will not have to pay taxes on your benefits if the amount is less than the first limit. You will have to pay taxes on half of your benefits if it falls between the limits. If it goes over the limits, you will have to pay taxes on 85% of your benefits.
Impact of Other Deductions and Credits
There are deductions and credits that can change how much of your Social Security benefits are taxed, so even though it seems simple, everyone’s tax situation is different and can be complicated. For instance, if your medical bills exceed a certain percentage of your AGI, you may be able to get a special deduction that lowers your taxable income.
You can also lower your tax bill by giving to qualified charities. This is especially true if you have a tax-advantaged retirement account, which can help you make a lot more money. Finding out all of your tax breaks and credits is the best thing you can do before you start to panic. This will help you get a better idea of how much you owe.
Exceptions and Special Cases
As we’ve already said, everyone’s needs are different, and the federal government knows that when it comes to how much they tax benefits. People who get benefits because of a disability are exempt from many of these rules. That way, even if you make more than the limits, you might not be taxed (or at least not as much) to help pay for your medical bills.
There are also types of income that are not taxed and certain situations, like getting a lump sum of money as a benefit, that may be taxed differently and would need to be looked at separately. If you’re not sure what to do, talk to someone from the IRS or a tax firm to avoid making mistakes.
Read Also :- Social Security Changes Under the Trump Administration – Here’s What Retirees Can Expect Starting in 2025