When you retire, you begin seeing a monthly deposit from the Social Security Administration. The amount of these benefits is determined based on your age at retirement, your income, and your work history. But, after retirement, questions that commonly pop up include: Do I still have to pay taxes, and do I have to pay taxes on my Social Security benefits? The simple answer to these questions is yes. Retirement benefits are technically still taxable income; however, the amount of taxes owed depends on your benefit amount and your additional income sources.
Now, it may seem odd that you might have to pay taxes on benefit income that you are finally receiving after paying Social Security taxes for years or even decades prior to retirement. Surprising or not, you may be forced to pay taxes on your benefits, especially if you continue to work.
Determining if your Retirement Benefits are Taxable
If Social Security benefits serve as your primary or only source of income, it is likely that you will have no tax requirements. However, no matter your income streams, you can run a quick test to determine if you will be liable for tax payments on your benefits come April.
First, you will determine your combined income. This is calculated by adding your adjusted gross income, nontaxable interest, and half of your social security benefits. Then, once you have your combined income, you will need to compare the amount to the IRS rules.
You should begin by comparing your income level to the base amounts provided by the IRS. For individuals, heads of household, and qualifying widows or widowers with a dependent child, this amount is $25,000. For married individuals filing jointly, the base amount is increased to $32,000. If the combined income you calculated is lower than this amount, it is likely that you will not be responsible for paying any taxes on your benefit amount.
If you are filing as an individual and your combined income falls between $25,000 and $34,000, you will be forced to pay taxes on up to 50 percent of your Social Security benefits. For those with an annual combined income exceeding $34,000, up to 85 percent of your retirement benefits are susceptible to taxation.
This process works similarly for those who are married and filing a joint return. For these amounts, you will need to combine the amounts of you and your spouse. If your income is between $32,000 and $44,000, up to 50 percent of benefits are taxable, and for combined incomes over $44,000, up to 85 percent of your benefits may be taxed. For those who are married and filing separate tax returns, it is likely that you will be forced to pay taxes on your benefits.
Calculating your Taxes
If you fall into one of the above categories where up to 50 percent of your benefits are taxable, you will need to determine the amount of half of your Social Security benefits and half of the difference between your combined income and the base amount set by the IRS. You will be taxed on the lower of these two amounts.
For example, let’s say you are filing as an individual with an adjusted gross income of $21,000 and benefits of $1,500 per month. This would give you total annual benefits of $18,000, half of which would be $9,000. Your combined income would be $30,000. This number falls between the $25,000 and $34,000 range, meaning you are susceptible to tax payment on up to 50 percent of your benefits.
To calculate the taxable amount, you will first take your annual benefits and divide them by two. Dividing $18,000 by two gives you $9,000. Then, you would determine half the difference between your income, $30,000, and the base amount, $25,000. Half of this $5,000 difference is $2,500. Since $2,500 is less than $9,000, this would be your taxable amount. For those making more than the upper range, the formula is slightly more complex, but follows a similar concept.