The number of individuals reaching the Social Security age in the United States continues to climb and many of those retiring are looking to enjoy some well deserved time off. So, at this stage in your life, how can you determine if you must pay taxes on your income derived from Social Security payments?
According to the Internal Revenue Service (IRS), “The amount of social security benefits that must be included on your income tax return and used to calculate your income tax liability depends on the total amount of your income and benefits for the taxable year.” In order to calculate whether your Social Security benefits are taxable, you must compare the base amount (for your filing status) with the total of:
- One-half of your benefits
- All of your other income, including tax-exempt interest
In addition, the amount for your filing status is shown as follows:
- 25,000 if you are single, head of household, or qualifying widow(er),
- $25,000 if you are married filing separately and lived apart from your spouse for the entire year,
- $32,000 if you are married filing jointly.
- $0 if you are married filing separately and live with your spouse at any time during the tax year.
By completing what is known as Worksheet A (1040), you will be able to determine whether or not you have to pay taxes on your social security benefits. If it is determined that taxes are owed, what is known as Worksheet 1 will help you to determine how much those taxes will be as you will be able to input your Social Security income, along with all other retirement income, part-time employment income, or any other benefits.
At this stage, you can complete Worksheet A. This will allow you to input your Social Security income, along with all other retirement income, part-time employment income, or any other benefits and tell if you will owe taxes on your Social Security benefits. If you will owe taxes, you will want to use Worksheet 1 to find out how much of your Social Security benefits will be taxed. Typically it will be 50% but can be has high as 85% depending on how much other income you had during the tax year.
Let’s take a look at an example:
Spouse A made $7,500 Social Security income, and Spouse B made $3,500 Social Security Income. They also made $22,800 in taxable pension. Total income from Social Security benefits is $11,000. You must take half of $11,000 ($5,500) and add that to $22,800 which is $28,300 total. Since this amount is less than the $32,000 amount for married couples, social security income is not taxable.
In addition to using the worksheet, you can review Publication 915 at IRS.gov website and read through examples, print off the worksheets, and get answers to frequently asked questions.