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Some people have to pay federal income taxes on the Social Security benefits they receive. Typically, this occurs only when individuals receive benefits and have other substantial sources of income from wages, self-employed earnings, interest, dividends, required minimum distributions from qualified retirement accounts, and other taxable income that must be reported on their tax returns.

Taxable Social Security Income

In accordance with Internal Revenue Service (IRS) rules, you won't pay federal income tax on more than 85% of your Social Security benefits. (At this time, there is no income level that creates a situation wherein Social Security benefits are 100% taxable for retirees.) The percentage of benefits for which you will owe income tax is dependent upon your filing status and combined income. If you:

  • File a federal tax return as an "individual" and your combined income is
    • Between $25,000 and $34,000 – you may have to pay income tax on up to 50% of your benefits
    • More than $34,000 – up to 85% of your benefits may be taxable
  • File a joint return, and you and your spouse have a combined income that is
    • Between $32,000 and $44,000 – you may have to pay income tax on up to 50% of your benefits
    • More than $44,000 – up to 85% of your benefits may be taxable
  • Are married and file a separate tax return, you will probably owe taxes on your benefits.

The IRS defines combined income as your adjusted gross income, plus tax-exempt interest, plus half of your Social Security benefits. You will receive a Social Security Benefit Statement (Form SSA-1099) each January detailing the amount of benefits you received during the previous tax year. You can use this when you complete your federal income tax return to determine if you owe income tax on your benefits. If you do owe taxes on your Social Security benefits, you can make quarterly estimated tax payments to the IRS or choose to have federal taxes withheld from your your payouts before you receive them.

When Social Security Is Not Taxable

For retirees who receive Social Security benefits with little to no supplemental influx of cash, either from retirement plan distributions or other earnings, their benefits are most likely not taxable. The average benefit received in tax year 2017 was $1,413.08 each month, totaling $16,956.96 annually; benefits are only taxable when overall income exceeds $25,000 for single retirees or $32,000 for couples filing joint tax returns. Individuals who are able to sustain the type of lifestyle they need or want on that level of income do not pay taxes on their Social Security benefits.

Avoiding Tax on Benefits

The simplest way to keep Social Security income free from income tax is to keep total combined income low; however, most retirees are not able to live on the average monthly benefit of $1,413.08 ($16,956.96 annually) without supplementing it from investments or savings. Individuals receiving Social Security benefits can get creative to avoid reaching or exceeding the relatively low combined income limits. Instead of taking distributions from a traditional IRA or other qualified retirement plan, such as an employer-sponsored 401(k) or 403(b), distributions from a Roth IRA may provide the supplemental income necessary to meet living expenses without affecting the combined income calculation.

Because Roth IRA distributions are made with post-tax dollars, withdrawals are tax-free in retirement and therefore do not increase total income for Social Security taxes. A similar effect can be achieved by withdrawing from conventional savings or money market accounts in lieu of tax-sheltered ones.

If Roth IRA or savings assets are not available, retirees may want to consider lowering living expenses to stay below the combined income limits. Paying off a mortgage balance or downsizing to a smaller home prior to receiving Social Security income may considerably reduce the need for supplemental income throughout retirement.

Although Social Security income is not fully taxable at any time, retirees need to be aware that benefits are subject to income tax under some circumstances and they must plan to reduce other sources of income if necessary.

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