Although Social Security is used as supplemental income for many recipients, others rely on it as a sole source of income. Regardless of the case, it’s important to know whether or not Social Security payments count as income for tax purposes and other financial contracts. In most cases, tax liability is determined by income level, but there are plenty of other tax-related situations in which income matters.
Does Social Security Count as Income?
Because of the income threshold set by the Internal Revenue Service, most Social Security will not count as income if it is the individual’s sole source of income. Depending on the situation, however, some portion of your Social Security payments may count as income, especially when you have additional income from sources other than Social Security. When filing your tax return each year, you will likely not need to list Social Security income as long as you are below that year’s threshold. As with anything related to taxes, it’s always a good idea to consult with a certified accountant or tax attorney to discuss the specifics of your unique financial status.
Take note that Medicare benefits do not factor into the income equation, but depending on the laws at the time you file your taxes, you may need to prove that you had health insurance through your Medicare benefits to avoid a penalty. In 2020, the fate of the Affordable Care Act is still up in the air, so it remains to be seen whether the mandate for coverage will continue to be an issue for citizens and tax filings in the future.
Does My Spouse’s Income Count?
Another situation many people find themselves in when they reach retirement age is when one spouse is receiving Social Security while the other is still working. In these situations, Social Security may count as income if you file your taxes jointly. This is because a joint tax return combines your income with your spouse’s income, and this may place you both into a tax bracket that requires additional tax payments. Because this is a unique tax situation, you will want to consult with a qualified tax professional to assess whether you are liable for an additional tax burden.
Is Social Security Taxable?
One way to know whether Social Security income is taxable is to add all of your income and compare it to current tax thresholds. If you have more than $25,000 in income as an individual or $32,000 as a married couple filing jointly, then the amount exceeding these limits does require an income tax. You also need to know what your state tax laws are regarding Social Security as income. Some states have special considerations for Social Security payments when it comes to tabulating your tax burden, so speak with a qualified tax attorney or accountant in your state to learn more about the potential for a Social Security income tax liability.
Paying Taxes on Income
When it comes to paying taxes on Social Security income, there are several ways to go about keeping your payments current. In many situations, you can make quarterly payments to avoid needing to make a large payment when you file your taxes annually. You can also choose to have taxes withheld from your payments by the Social Security Administration. This process works much the same as it does when an employer withholds taxes. The amount is automatically deducted from your payment and is sent to the Internal Revenue Service on your behalf. Choosing this method is often more convenient, but if you want to have more control over your payments and finances, you might want to choose the former option.
Although it’s already been stated, if you have any questions regarding your taxable income or tax liability, it is imperative that you work with a tax professional who can provide you with guidance with your specific needs in mind. Tax laws can be complicated, and no two tax situations are exactly the same. Working with a tax professional or accountant can alleviate the burden of dealing with your own taxes, but it can also save you from facing penalties and fees if you misreport retirement income or fail to make required payments.