For many people, Social Security benefits are not taxed. For other people, up to 85 percent of their benefits are. Calculating your tax liability can be confusing. The Internal Revenue Service offers a worksheet to help taxpayers determine whether their benefits will be taxed. The portion of your Social Security benefits that is deemed taxable is added to your income and may impact your tax bracket for the year.
At least 15 percent of your Social Security benefits is exempt from taxation. For many retirees, all their Social Security benefits are tax-free because they do not have any other significant income. However, for those who do earn other taxable income, such as wages, interest or dividends, up to 85 percent of their Social Security benefits is subject to tax.
To find out if your Social Security benefits will be taxed, you can fill out Worksheet A of IRS Publication 915. This will require you to add up all the Social Security benefits you received for the year and divide the amount in half. You will add that amount together with all your taxable income and tax-exempt interest income for the year to produce your total income. Compare this total with the base amount provided by the IRS. For 2012, the base amounts were $32,000 if you were married filing jointly; zero if you are married filing separately and lived with your spouse any time during 2012; and $25,000 for all other filing statuses. If your total income is less than the base amount, your Social Security benefits will not be taxed.
Taxpayers whose total income exceeds their base amount have to pay tax on a portion of their Social Security benefits. For 2012, 50 percent of your Social Security benefits is taxable if your total income exceeds the base amount but is under $34,000 or $44,000 if you are married and file jointly. If your income exceeded these thresholds or you were married and file separately and lived with your spouse at any point in 2012, 85 percent of your Social Security benefits is taxable. The amount of tax you will pay depends on the tax bracket you fall within. For 2012 there were seven tax brackets: 10, 15, 25, 28, 33, 35 and 39.6 percent. Most taxpayers fall within the first three tax brackets.
If you received Social Security benefits, they will be reported on a SSA-1099 form. If you did not receive the form or misplaced it, you can order another one from the Social Security Administration online (see Resources); it takes about 10 days to receive by mail. If you want income tax withheld from your Social Security benefits, complete IRS form W-4V and return it to your local Social Security office. You can elect to have a flat 7, 10, 15 or 25 percent withheld each month -- other amounts are not allowed.
- Social Security Choices: Taxes and Social Security Benefits
- Social Security Administration: Benefits Planner -- Income Taxes And Your Social Security Benefits
- The Bogleheads: Taxation of Social Security Benefits
- The American Association of Individual Investors: Figuring Taxes on Social Security Benefits
- Social Security Online: Request an SSA-1099/1042S for Tax Information
- Internal Revenue Service: Social Security and Equivalent Railroad Retirement Benefits
- Social Security Administration: Benefits Planner -- Withholding Income Tax from Your Social Security Benefits
Sara Mahuron specializes in adult/higher education, parenting, budget travel and personal finance. She earned an M.S. in adult/organizational learning and leadership, as well as an Ed.S. in educational leadership, both from the University of Idaho. Mahuron also holds a B.S. in psychology and a B.A. in international studies-business and economics.