When calculating the amount of money you will have during retirement, Most people overlook the correct computation of the tax amount they will have to pay and how it might compromise their benefits.
Although most states do not tax Social Security benefits, federal taxes are not as forgiving since there are specific situations when your benefits could be taxed.
Up to 50% of benefits could be taxed for people above a specific income level and up to 85% of benefits could be charged for those who are even higher earners. While most Social Security recipients have no need to worry about this, some should be informed of some information.
Determining the Taxable Amount of Social Security
What the Internal Revenue Service (IRS) uses to decide if and how much of your benefits will be taxed is called “combined income.” Your adjusted gross income (AGI), interest that isn’t taxed, and half of your Social Security payments make up this amount.
Your AGI is all of your income, minus the tax breaks the IRS lets you claim. It includes wages, bonuses, dividends, capital gains, business income, and other income. Interest that isn’t taxed on things like bonds has to be included because they are resources that you can use, even if they aren’t charged directly.
Once you know the total amount, you will need to compare it to the IRS income limits to see if your Social Security payments are taxed. These levels are meant to keep retirees with lower incomes from having to pay taxes on their benefits. They are changed occasionally to make sure that only the wealthiest pensioners have to pay taxes on their benefits. The levels are as follows:
- Single filers: $25,000 and $34,000
- Married filing jointly: $32,000 and $44,000
- Married filing separately: $0 (if you lived with your spouse at any time during the year)
Other types of filers, like head of family or qualifying widow(er), usually have to meet the same requirements as single filers.
You will not have to pay taxes on your benefits if the amount is less than the first limit. You will have to pay taxes on half of your benefits if it comes between the limits. If it goes over the limits, you will have to pay taxes on 85% of your benefits.
There are deductions and credits that can change how much of your Social Security benefits are taxed, so even though it seems easy, everyone’s tax situation is different and can be complicated. For instance, if your medical bills exceed a certain percentage of your AGI, you may be able to get a special deduction that lowers your taxed income.
Giving to qualified charities can also help you pay less in taxes, especially if you have a tax-advantaged retirement account, which can help you make a lot more money. To get a better idea of how much you owe, it’s best to make a list of all the tax breaks and credits you’re eligible for.
Exceptions and Special Cases
We’ve already said that everyone is different, and so are their needs. The federal government knows this, which is why they tax benefits differently. When someone gets benefits because of a disability, they are free from many rules.
Even if you make more than the limits, you might not be charged (or at least not as much) in those situations so that you can better pay for your medical bills.
Also, some types of income are not taxed, and certain situations, like getting a lump sum of money as a benefit, may be taxed differently and would need to be looked at individually. If you aren’t sure what to do, talk to someone from the IRS or a tax firm to avoid making mistakes.