Social Security is more than just a check you get every month, it’s the result of years of work or a mere favour they do you when you’re not able to work. For millions of people, Social Security (SSA) is their key source of income, but not many know that their entire income can be subject to taxes… Yes, just like you read it… You could be owing money to the administration and it all depends on how much each individual earns. We’ll tell you everything you need to know below.
When do you need to file your benefits?
For those beneficiaries whose only source of income is Social Security, you most likely don’t have to file taxes at all. But what about combined income? That will be subject to IRS criteria, so if you receive pensions, 401(k) distributions, investments, or other types of part-time work and you exceed the limits set by the IRS. Here are some examples:
- For example, if you are single and over 65, you should not file taxes if your gross income is less than $16,550.
- For married couples filing jointly and both are over 65, the limit is $32,300.
What is combined income?
A formula that the IRS follows to determine whether or not the money you receive is subject to taxes.
How is it calculated?
- Adjusted gross income (AGI): wages, pensions, self-employment income, rents, taxable interest, dividends, and any other taxable income.
- Tax-exempt interest: interest generated by municipal bonds and other financial instruments that do not pay federal taxes.
- Half of Social Security benefits: 50% of the annual payments received from Social Security are added.
- Here’s an example:
If a retiree receives (annually) $25,000 from Social Security, $15,000 from a pension, and about $2,000 in other types of bonuses, he would end up receiving $27,000 based on this calculation, so up to 50% of his income could be subject to taxes (exceeding the $25,000 limit imposed by the IRS).
But when are they taxed?
For singles, if your combined income is between $25,000 and $34,000, up to 50% of your benefits may be taxable. If it exceeds $34,000, up to 85% could be taxed.
For couples filing jointly: A combined income between $32,000 and $44,000, up to 50% of benefits may be taxable. If income exceeds $44,000, up to 85% could be taxed.
What happens if I decide not to pay my taxes
Nobody likes paying taxes, but this money “taken from us” is essential to keep public services running, so it is our obligation as citizens to pay taxes.
- If you don’t, the IRS will send you a notice with the outstanding amount you must pay.
- If not resolved, interest and penalties for not filing on time could accrue, which could reach up to 25% of the amount owed.
In extreme cases, the IRS could seize up to 15% of your Social Security payments to cover the tax debt, so it’s almost better to pay it on time.
Can I minimize or avoid taxes?
No, but you can reduce your tax impact in the following ways:
- If you have additional income, distribute it strategically so that it doesn’t exceed IRS thresholds.
- Take advantage of Roth IRA distribution accounts.
- You can choose to have the IRS withhold a percentage of your payments so you don’t get a surprise at the end of the tax year.
Don’t forget that it is our obligation as citizens to pay taxes to the administration, and that it is key to plan ahead so that we are not caught off guard!