We get these questions all the time from people who are ready to retire and are eligible to receive Social Security benefits. One of the things that you want to understand ahead of time is whether t those retirement benefits are taxable or not. The short answer is…

It depends.

Here are some things to keep in mind when considering the tax ramifications of collecting your benefits.

How Do I Know What’s Taxable?

The amount you pay in taxes on social security benefits will depend on your filing status and the other types of income you earn such as wages, interest, and dividends. Your combined income provides the basis for calculating the taxable amount of your social security benefits.

Your combined income is calculated by taking your adjusted gross income and adding one-half of both your non-taxable income and social security benefits received.
Regardless of your other sources of income, no taxpayer will be required to pay taxes on more than 85% of the social security benefits received.

Single or Head of Household

For individual taxpayers with combined income below $25,000, no tax is owed on benefits paid.

For combined income between $25,000 and $34,000, up to 50 percent of Social Security benefits are taxable.

For combined income over $34,000, up to 85 percent of benefits are subject to taxation.

Married Filing Jointly

Married couples filing a joint return with less than $32,000 in combined income are exempt from paying taxes on Social Security income.

If your combined income ranges from $32,000 to $44,000, up to 50 percent of your social security benefits are taxable.

For combined incomes greater than $44,000, up to 85 percent of benefits are taxable.

Married Filing Separately

For married taxpayers filing a separate return, there are two methods for calculating the portion of your taxable social security benefits. If you lived with your spouse, up to 85 percent of the benefits are taxable no matter the amount of your combined income.
For taxpayers who did not live with one another at any point during the year, they may use the individual income scale in determining the taxable amount.

How Do I Pay Taxes On My Benefits?

If you believe that your social security benefits will be taxable you can make estimated tax payments on the amounts you think you will owe. Alternatively, you can have taxes withheld directly from your benefits. IRS Form W-4V (Voluntary Withholding Request) should be filed with your local Social Security office in order to get the process started.

What Happens If I Receive a Lump Sum Payment for Prior Years?

When you receive a lump sum payment for prior year benefits, the tax landscape gets a little more complex.

You can’t amend your prior year tax returns for a lump sum payment received in the current year. You have two alternatives for determining the tax liability on your social security income.

● You can calculate your benefits based on your current year’s combined income.
● You can separate out the portion of the lump sum payment attributable to the prior year and calculate the tax attributable to the prior year portion based on that year’s income.

You may choose whichever method results in the lowest tax liability.

Are Social Security Benefits Taxable in My State?

The taxability of social security benefits depends on the state in which you reside. Currently, three states with a state-level income tax exclude social security benefits from income: Alabama, Mississippi, and Pennsylvania. There are currently seven U.S. states that don’t have an income tax: Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming. Residents of New Hampshire and Tennessee are also spared from handing over an individual income tax, though they do pay tax on dividends and income from investments.

To determine the taxability of benefits in your specific circumstance, contact your tax advisor.