Do You Have To Pay Taxes On Social Security Checks

Do You Have To Pay Taxes On Social Security Checks – I have some unfortunate news. When you look at your last paycheck, you’ll see a guy called “FICA” subtracting money from your take-home pay. A portion of this FICA tax is sent to the Social Security system, which entitles you to receive Social Security payments when you retire. The unfortunate news is that, even if it was a tax you paid while you were working, when you go to get your Social Security payments, most retirees will have to pay some form of income tax on it. So, is it a tax that you pay on a tax? Quite a lot!

First, let’s start with how much of your Social Security is considered taxable income. It ranges from 0% to 85% of the amount received. Where you fall in that range depends on the amount of income you have each year. Here is the table for 2021:

Do You Have To Pay Taxes On Social Security Checks

But, here’s the kicker. 50% of your Social Security benefit you receive counts toward the earnings numbers listed in the table above to arrive at your “combined earnings” amount. Here is the formula:

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If you are a single taxpayer, and you receive $30,000 in Social Security benefits, you already start at a combined income level of $15,000, before adding any other income from work, pensions, pre-tax. Distributions from retirement accounts, investment income or rental income.

As you can see in the table, if your combined income for a single filer is under $25,000, or a joint filer under $32,000, you do not have to pay tax on your Social Security benefit. Taxpayers above this threshold must pay some form of tax on their Social Security benefits. But I have a little good news: nobody has to pay tax on 100% of their profit, because the highest percentage is 85%. Therefore, everyone gets at least 15% of their profit tax-free.

NOTE: The IRS does not index the combined income amounts in the table above for inflation, which means that even if an individual’s Social Security and wages increase over time, the dollar amounts listed in the table will remain the same the same from year to year. This has resulted in more and more taxpayers having to pay tax on a larger portion of their Social Security benefits over time.

Your Social Security benefits are taxed as ordinary income. There are no special tax rates for Social Security like capital gains rates for investment income. Social Security is taxed at the federal level, but may or may not be taxed at the state level. Currently, there are 37 states in the United States that do not tax Social Security benefits. There are 4 states that tax it at the same level as the federal government and there are 13 states that partially tax the benefit. Here is the table:

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For taxpayers who know they will have to pay taxes on their Social Security benefits, it’s usually a good idea to have Social Security taxes taken directly from your Social Security payments. Otherwise, you’ll have to issue checks for estimated tax payments throughout the year, which can be a headache. They offer you only four federal tax withholding options:

These percentages are applied to the full amount of your Social Security benefit, not just the 50% or 85% that is taxable. Just something to consider when choosing your retention options.

To make a withholding election, you must complete Form W-4V (Voluntary Withholding Request). Once you have completed the form, which only has 7 lines, you can submit it by post or at the nearest social security office.

If you choose to turn in your Social Security benefit before normal retirement age (NRA) AND you plan to continue working, you need to be aware of the Social Security earned income penalty. Your normal retirement age is the age that you are eligible to receive your full Social Security benefit, and it is based on your date of birth.

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The income penalty ONLY applies to taxpayers who turn off their Social Security before normal retirement age. If you have reached your normal retirement age, this penalty does not apply.

Basically, the IRS limits how much you’re allowed to earn each year if you choose to turn in your Social Security early. If you earn more than these amounts, you may have to pay all or part of the Social Security benefit back to the government. In the chart below, “FRA” stands for “Full Retirement Age”, which is the same as “Normal Retirement Age” (NRA). Also note that for married couples, the earnings figures below apply to your personal income, and do not take into account your spouse’s income.

Income under $18,960: If you have earned income under $18,960, no penalty, you will receive your full Social Security benefit

Income above $18,960: You lose $1 of your Social Security benefit for every $2 you earn over the threshold. Example:

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The following year, your $20,000 Social Security benefit will be reduced by $10,520 for the assessment of the earned income penalty. Ouch!!

As a general rule of thumb, if you plan to work before Social Security normal retirement age, and your wages will be above the $18,960 limit, it usually makes sense to wait to turn on your Social Security benefit until your wages are below the threshold or you reach normal retirement age .

NOTE: You will see in the middle row of the table “In the calendar year FRA is reached”. In the year you reach your full Social Security retirement age, the wage threshold is higher and the penalty is lower (a $1 penalty for every $3 over the threshold).

Hi, I’m Michael Ruger. I am the managing partner of Greenbush Financial Group and the creator of the nationally recognized Money Smart Board blog. I created the blog because there are many events in life that require important financial decisions. The goal is to help our readers avoid big financial mistakes, discover financial solutions they weren’t aware of, and optimize their financial future.

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