Is Social Security taxable?

Social security is taxable under certain circumstances. These circumstances depend on both an individual’s annual yearly income and his or her marital status. Generally, if Social Security benefits are the only source of income, the benefits will not be taxable. Even if an individual does have another source of income, Social Security benefits will only be taxed if the individual’s total combined income is over a certain amount. However, as income rises, the proportion of Social Security benefits that becomes taxable increases.

How to Compute Taxable Social Security Benefits

To determine if Social Security benefits are taxable, the IRS requires that an individual calculate his total combined income, plus one-half the amount of Social Security benefits received that year. You can find a worksheet in the 1040 instruction book that can help you determine this exact amount. The total combined income will include both non-taxable income and taxable income. This number is then subject to a varied rate system. The rate system is based on the individual’s marital status, and if married, whether a joint or separate tax returns will be filed.

There are two sets of numbers in the varied rate system, one called a base amount, and the other an additional amount. If an individual’s total income, plus half of his Social Security benefits is less than the base amount, the Social Security benefits are not taxable. If the total number is above the base amount, but below the additional amount, then up to half of the individual’s Social Security benefits will be taxed. If the total number is above the additional amount, up to 85% of the individual’s Social Security benefits will be taxed that year.

If an individual was single, head of household, or was a qualifying widow(er) in 2018, the base amount is $25,000 and the additional amount is $34,000. These amounts are also the same if an individual was married, but was living apart from his spouse for the entire year, and files a separate return. If an individual was married and files a joint return, the base amount is $32,000 and the additional amount is $44,000. Finally, if an individual was married and lives with his spouse, but files a separate tax return, the base amount is $0 and there is no additional amount.

For example, if a single individual’s total combined income was $15,000 and half of his annual Social Security benefits amounted to $7,000, his total number of $23,000 would fall below the base amount, so his Social Security benefits would be non-taxable. However, if this same individual was married and living with his spouse, but continued to file a separate tax return, then his base amount becomes $0 and his Social Security benefits will be taxed up to 85 percent. Let’s now suppose that he decides to file a joint tax return with his spouse and their combined income plus half of their combined social security benefits amount to $40,000. Since this number falls between the base amount and additional amount in this category, only half of the couple’s Social Security benefits would be subject to taxes.

Tips for Tax Planning and Helpful Resources

If you find that your Social Security income is taxable, some planning can help reduce the burden. One way to avoid a large tax bill at the end of the year is to make estimated quarterly tax payments to the IRS. You can also choose to minimize your tax bill next year by having federal income tax withheld from your benefits. This is done by completing Form W-4V, Voluntary Withholding Request, and filing it with the Social Security Administration. You can choose to have 7 percent, 10 percent, 12 percent or 22 percent of your total benefit payment withheld, which can help reduce the amount owed in taxes at the end of the year. If you change your mind about having taxes withheld later on, you can have it stopped by re-filing the same form.

Additional information on the taxability of Social Security benefits in 2018 is available on a section of the IRS website called, “Social Security and Equivalent Railroad Retirement Benefits.” Another recommendation is to consult a tax attorney about planning any potential tax burden your Social Security benefits may carry during your retirement years.

Case Studies: Understanding the Taxability of Social Security Benefits

Case Study 1: Non-Taxable Social Security Benefits

Mary is a retired individual who receives Social Security benefits as her only source of income. Since her total combined income falls below the base amount set by the IRS, her Social Security benefits are not taxable. Mary does not need to pay any taxes on her Social Security income, allowing her to fully enjoy her retirement funds.

Case Study 2: Partially Taxable Social Security Benefits

John is a married individual who receives both Social Security benefits and additional income from a part-time job. His total combined income, including half of his Social Security benefits, exceeds the base amount but is below the additional amount set by the IRS. As a result, only a portion of John’s Social Security benefits is subject to taxation. He needs to include this portion in his tax return and pay taxes accordingly.

Case Study 3: Fully Taxable Social Security Benefits

Sarah is a married individual who files a separate tax return from her spouse. Her total combined income, including half of her Social Security benefits, exceeds the additional amount set by the IRS. Therefore, up to 85% of Sarah’s Social Security benefits are subject to taxation. She needs to report the taxable portion of her benefits on her tax return and pay taxes on that income.