Greetings! I hope this finds you well and enjoying life!

Did you know that you might have to pay federal income tax on your Social Security retirement benefit? If the only income you had during the year was Social Security income, then your benefit usually isn’t taxable. However, if you earned other income during the year or had substantial investment income, then you might have to pay federal income tax on part of your benefit if your total income exceeds a certain base amount.

If you have earned income or investment income over the base amount, you can use certain strategies to minimize (or even eliminate) the amount of tax you have to pay on your Social Security benefit. These strategies include changing your filing status and reducing your modified adjusted gross income (MAGI).

Before you consider ways to minimize taxation of your Social Security retirement benefit, you must determine whether your benefit is taxable at all. Your benefit is taxable if one-half of your Social Security benefit plus your MAGI exceeds the base amount for your filing status.

Your MAGI includes taxable pensions, wages, interest, dividends, and other types of taxable income. It also includes tax-exempt interest income plus normally excludable income such as interest from Series EE savings bonds (which may also be called Patriot bonds) and the foreign earned income of U.S. citizens and residents.

When you fill out your federal income tax return, you choose your filing status based on your marital status. You can file in one of five ways: single, married filing jointly, married filing separately, unmarried head of household, or qualifying widow or widower (with a dependent child). For Social Security purposes, your filing status is important because the amount of income you can have before your benefit is taxable depends partly on your filing status.

How much income you can have before your Social Security benefit becomes taxable is known as the base amount. The base amount is determined by law and is not adjusted annually for inflation. The base amount that you use to determine the taxability of your Social Security benefit depends upon your filing status. Your base amount is:

  • $25,000 if you file as single, head of household, or qualifying widow(er)
  • $25,000 if you file as married filing separately and you lived apart from your spouse for all of the tax year
  • $32,000 if you file as married filing jointly
  • $0 if you file as married filing separately and you lived with your spouse at any time during the tax year

At the end of each tax year, the Social Security Administration will send you a form SSA-1099 or RRB-1099 showing the amount of benefit you received during the year. You can use this to figure out whether any of your benefit will be taxable. You can use Worksheet A in IRS Publication 915, Social Security and Equivalent Railroad Retirement Benefits to calculate whether your total income as defined above exceeds the base amount for your filing status.

Even if you determine that your Social Security retirement benefit is taxable, you won’t have to pay tax on your whole benefit. Either up to 50 percent or up to 85 percent of your benefit will be taxable, depending on your filing status and whether the total of your MAGI and one-half of your Social Security benefit exceeds a certain limit. On IRS Form 1040, adjusted gross income (AGI) is your gross income minus certain “above-the-line” deductions allowed by law. These include:

  • Certain business expenses of reservists, performing artists, and fee-basis government officials
  • IRA deduction
  • Student loan interest deduction
  • Health savings account deduction
  • Moving expenses
  • Deductible part of self-employment tax
  • Self-employed health insurance deduction
  • Self-employed SEP, SIMPLE, and qualified plans
  • Penalty on early withdrawal of savings
  • Alimony paid
  • Domestic production activities deduction.

Your MAGI is your AGI, minus (or not including) the taxable amount of your Social Security benefits, plus income that is normally not included in AGI (such as foreign earned income and income from qualified U.S. savings bonds).

Up to 50 percent of your retirement benefit will be taxable if the total of one-half of your benefits and your MAGI is more than the following base amount for your filing status:

  • $25,000 if you’re filing as single, head of household, or qualifying widow(er)
  • $25,000 if you’re filing as married filing separately and you lived apart from your spouse for the whole tax year
  • $32,000 if you’re filing as married filing jointly

Up to 85 percent of your retirement benefit will be taxable if one-half of your Social Security benefit plus your MAGI exceeds the following base amount for your filing status:

  • $34,000 if you’re filing as single, head of household, or qualifying widow(er)
  • $34,000 if you’re filing as married filing separately and you lived apart from your spouse for the whole tax year
  • $44,000 if you’re filing as married filing jointly
  • $0 if you’re filing as married filing separately and you lived with your spouse at any time during the tax year

Because the calculation is complex, you need to use a worksheet to compute your taxable benefit. Several worksheets are available from the IRS. What worksheet you use depends upon your situation. In general, you can use the worksheet available in the instructions for IRS Form 1040 or 1040A or Worksheet 1 in Publication 915. You may be able to deduct the amount of Social Security retirement benefit that was taxed from your state income tax return. Check with your tax advisor or state tax official to find out if your state allows this deduction.

If you have questions or feel that we can help you in any way with retirement finances or retirement planning, don’t hesitate to contact us.

Best regards,

Jeff Christian CFP, CRPC

 

 You must remain focused on your journey to greatness.

Les Brown

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