Did You Know Your Social Security Benefits Could be Taxable?
Social Security benefits are usually only taxed if you have other significant income (such as wages, self-employment, interest, dividends, and other taxable income that is reported on your tax return) along with your benefits. In order to determine if your benefits are taxable you need to know what your combined income is. (Below is a breakdown of what is included in combined income)
Your adjusted gross income
+ Tax Exempt Interest Income
+ ½ of your Social Security benefits
= Your “combined income”
Based on IRS rules, no one pays federal income tax on more than 85% of their Social Security benefits.
|Income||Percentage of Benefits Taxed|
|Single||$25,000 – $34,000||50%|
|$34,000 – above||85%|
|Married Filing Jointly||$32,000 – $44,000||50%|
|$44,000 – above||85%|
If you plan to work while receiving Social Security benefits it is crucial to make sure that your combined income remains lower than the base amounts of the taxable thresholds discussed above. If your benefits are taxable you have the option to have federal taxes withheld from your benefits or you can make quarterly estimated tax payments to the IRS. To have federal taxes withheld from your benefits, you will need to fill out a Form W-4V from the IRS and select the monthly percentage that you want withheld from your benefits, either 7, 10, 12, or 22 percent.
You should also be aware that if you plan on working and receiving Social Security benefits before the full retirement age (66 and 4 month for those born between Jan. 2, 1956 and Jan. 1, 1957) your benefits will be reduced by $1 for every $2 earned over $17,040. On the upside, if benefits were withheld before full retirement age because of excess wages, your benefits will increase starting at your full retirement age to take into account those months in which benefits were withheld.
It is important to note that if you decided to receive benefits before your full retirement age, which can be as early as age 62, it may result in a reduction in your benefits of up to 30%. The reduction is calculated based on the number of months you receive benefits before full retirement age. Your benefits are reduced by 0.56% for each month before full retirement age up to 36 months and reduced by 0.42% per month for benefits claimed over 36 months.
If you were to retire at age 62, 5 years before the full retirement age of 66, your total benefit reduction would be reduced by 0.0056 (5/9 of 1%) times 36 months plus 0.0042 (5/12 of 1%) times 24 months. Resulting in a 30% reduction of benefits, calculation shown below:
0.0056 (5/9 of 1%) * 36
+ 0.0042 (5/12 of 1%) * 24
0.30 Or 30%
Feel free to contact your KTLLP Tax Advisor for any further questions or assistance.
Form W-4V https://www.irs.gov/pub/irs-pdf/fw4v.pdf