There are numerous reasons why an individual may receive Social Security benefits: you may be getting them because you have reached the age of eligibility, because you have retired, or because of a disability. Regardless of what your circumstance is, you need to understand that these benefits are not necessarily tax free—in fact, in most cases they are taxable, and the amount that they are taxed depends on several variables as outlined below.
The first thing you need to know is that Social Security benefits are not the same as Supplemental Security Income benefits. Those benefits are never taxable, so if you are receiving those payments, remember that the rules provided here do not apply. Similarly, if you do receive Social Security benefits and they are the only income that you receive, it is highly unlikely that they will be taxable.
However, if you have other sources of income, and they are significant, then there’s a good chance that you are facing a tax liability on up to 85% of your benefits. The same is true if you file a separate tax return from a spouse with whom you live for any portion of the tax year. In order to discourage married taxpayers from trying to cut their taxable income by filing separately, the government has created an automatic 85% tax liability on Social Security benefits for filing married by separate.
To facilitate the ability to calculate what percentage of Social Security benefits are taxable, the government has provided the following threshold amounts:
To figure out whether you meet or exceed the threshold, add half of your total Social Security benefit to all of your other income. This should include tax-exempt interest and other amounts that are excluded from income. Your total should be compared to the thresholds above. Whatever exceeds the threshold may be taxable.
What can you do to minimize the amount that your Social Security benefits are taxed?
Anything you can do to defer or lower the amount of your additional income will help minimize your tax liability. This may mean taking IRA (Individual Retirement Account) distributions, though the minimum distribution rules and other requirements pertinent to your specific accounts may prevent you from doing so.
The best way to determine whether there are tax-reduction steps that you can take is to speak to a five-star reviewed tax professional about your particular scenario. Doing so may provide you with smart and simple ways to hold on to more of your benefits.
Bob Mason, CPA writes for CountingWorks, an accounting news and advice website. Reach his office at [email protected].
About Bob Mason, CPA
Santa Cruz based Bob Mason, CPA (Coast Financial Services) has been providing the people of Santa Cruz with years of expertise in the tax and accounting industry. He provides a broad range of accounting, bookkeeping and small business services to help your business succeed. Using their expertise in technology they have built an intuitive website with useful tools and calculators and a monthly blog which they post to on a frequent basis. Check back weekly for their next tax or accounting topic.
