As you may or may not know, you probably will have to pay taxes on your Social Security income. What you may not know is that this amount is determined by many factors. If you are worried about paying taxes on Social Security income, look no further; we will discuss in detail the specifications that go into determining whether you will pay taxes or not.
Learn more about whether you need to pay taxes on your Social Security benefits or what to expect when you reach the age to retire. We know these things are at the top of your agenda, which is why we have decided to discuss the details that go into the calculations that determine what portion of your income you will pay taxes on.
Do Seniors Pay Taxes on Social Security Income?
Most American taxpayers are required to pay taxes on Social Security income. However, this is not always the case. You might be required to pay income tax on up to 85% of your Social Security income, but it will depend on how much money you make from Social Security and from other sources of income.
If you have a freelance business on the side, that income is taxable, for example. Basically, if your total gross income is at least $25,000, regardless of where that income comes from, for individuals or at least $32,000 for couples filing joint returns, you will need to pay income taxes. Learn more about being a freelancer and paying taxes.
Keep in mind if you are married and decide to file a separate tax return, you will be considered an “individual” for the purpose of the above statement. If you are a married couple filing a joint annual tax return, you will qualify for taxes if your combined gross income is at least $32,000, as mentioned.
For further assistance in determining the right filing status if you are married, check out the article on married couples filing taxes together or separately.
Why You Must Pay Taxes on Social Security
It can be confusing when you think about Social Security coming from the government and being taxed on such income. You might think that this income is not taxable, but when you combine it with other income, you are typically required to pay taxes on the income. So, why does this happen?
Basically, there is a threshold that the IRS (Internal Revenue Service) has established that helps determine if you are required to pay taxes on your income or not. These thresholds are very low, and if your income pushes you above-said threshold, the taxes do kick in.
What Part of Your Social Security Income Is Taxable?
Social Security has been taxable since 1983 – believe it or not! Therefore, paying taxes on Social Security income is not a new concept or fact; it’s been around quite a while. It probably seems to be a hot topic right now because many Americans are reaching the age at which it is time to start thinking about retirement!
So, how much of your Social Security income is taxable, and how does it work? First of all, you are not required to pay taxes on all of your Social Security benefits. Rather, you will pay on a portion of that income. Second, the IRS used your adjusted gross income to determine how much you will pay. Finally, this will take a little bit of computation (math)!
The IRS takes your combined income amount to determine how much tax you will pay. The combined income amount is equal to your adjusted gross income, including interest and half of your Social Security benefit amount. You might be wondering where these amounts come from. Let’s look into the determination of these figures a bit more.
The interest used in this calculation would be tax-exempt interest. You will not be paying taxes on this amount, but it is needed in order to determine which portion of your income you will be paying taxes on. When in doubt, seek the counsel of a tax professional!
Adjusted Gross Income
Your adjusted gross income will include your Social Security and any other earned income. It will also include dividends, interest, and any other taxable income. It’s a smart idea to understand the difference between taxable and nontaxable income sources.
If you have a job that provides you with supplemental income, that will count as taxable income, for example.
Paying Taxes on Social Security Income
When paying taxes on Social Security income, you will need to understand how to compute using the IRS tax brackets. It’s actually a pretty simple determination in this case, but it’s still a good idea to understand how to use tax rates. You will want to know where your money goes, right? This is especially critical when you have retired and are earning supplemental income!
How Much of My Social Security Income Will Be Taxed?
If you have earned more than $25,000 in the combined income amount, according to the calculation discussed in the previous section, you will need to pay taxes. You will just need to know the amount of your combined income for these determinations.
If you’ve earned between $25,000 and $34,000 as your combined income amount, you will likely have to pay taxes on up to 50% of your Social Security benefits.
If you’ve earned over $34,000 as your combined income amount, you will likely have to pay taxes on up to 85% of your Social Security benefits.
In other words, between 50% to 85% of your Social Security income amount may be taxable.
To learn more about the calculations used in determining how much of your Social Security income will be taxed, refer to the Internal Revenue Service’s Retirement Page or seek the counsel of a qualified tax consultant or accountant. It’s never wise to make uninformed decisions about whether you need to pay taxes or not!
When you are ready to hire the best in regards to your taxes, be sure to contact Borshoff Consulting. We are happy to add you to be among the crowd of our satisfied customers and clients! We’d like nothing more than to provide you with the best service and knowledge. Reach out today at 317-846-1005. We’re excited to hear from you!