February 15, 2013

When it comes to retirement many Americans believe they can count on their full Social Security benefits as a core element of income. You can imagine the surprise at tax-time when some of these same benefits are returned to the Federal Government in the form of benefit reduction and taxation. Here is what you need to know.

  1. Social Security and Retirement Benefits can be "REDUCED" as well as taxed. The benefit reduction calculation is separate from the taxability of your benefits. If you start drawing retirement benefits prior to reaching your full retirement age (65 if born prior to 1938, and it gradually increases up to age 67 if born in 1960 or later) in 2014 your benefits could be reduced $1 for every $2 of earnings over $15,480. This calculation is less punitive if it occurs during the year of retirement, but you should forecast this potential benefit reduction prior to deciding to start taking your benefits.
  2. If you do not work, your Social Security benefit will probably not be impacted.
  3. Your Social Security Benefits can be taxed no matter how old you are. There is not an age threshold that protects your Social Security Benefits from federal taxation. If you have sufficient income, your benefits could be taxed.
  4. If you have other income your Social Security benefits may be taxed. The taxability of Social Security benefits depends on two things; your qualified total income and your marital status. If your total income surpasses certain thresholds (called base amount), some of your benefits could be taxed.
  5. Can you estimate whether your benefits will be taxed? Yes. Per the IRS, here is a quick calculation to determine if your benefits may be taxable:

    1st: Calculate 1/2 of your annual Social Security benefit

    2nd: Add the 1/2 benefit total to all your other estimated income. (Use income from all sources including tax exempt interest.)

    3rd: Compare your calculated total to the base amount for the year. If it exceeds the base amount, some of your Social Security benefit may be taxed.

    2014 Social Security Base Amounts:

    $25,000: Single, Head of Household, Widow or Married Filing Separately:

    $32,000: Married filing Joint

  6. Are all your Social Security benefits taxable? No, a maximum of 85% of your Social Security benefits is subject to federal tax.

Q: Is it possible to get the government to withhold taxes from my Social Security benefits?

A: Yes. Call Social Security at 800-772-1213 and ask for IRS Form W-4V. Or get the Voluntary Withholding Request form online. The form will give you four choices as to how much money you want withheld from your monthly payments: 7 percent, 10 percent, 15 percent or 25 percent. The withholding may make it easier for you to pay your taxes when April 15 rolls around each year.


Q: And how about states? Do they tax Social Security benefits?

A: It depends where you live. According to the Washington-based Tax Foundation, 27 states and D.C. do not tax Social Security income. Iowa is expected to join the list this year. The 22 remaining states may or may not tax Social Security benefits based on a variety of rates and policies. To see a map showing what happens in each state, visit the TaxFoundation.org.

Note: To qualify as married filing separately, you must also be living apart for the entire year. The base amount if you lived together is $0. There is also a significant marriage penalty in the taxability of your Social Security benefits as the joint amount is only $32,000 instead of $50,000 (or 2 times the single "base" amount).

Topic: Advice