Tips for calculating your Social Security taxes Don’t worry, at the end of the year, Social Security will send you a statement of your benefits for you to use when completing your federal income tax return. If you and your spouse file jointly, remember to include income from both you and your spouse. The IRS includes half of your Social Security income as part of the combined income calculation. government pay interest that is tax exempt at the state and local levels, but not the federal level. Some municipal bonds may also be “triple exempt” so you’re not required to pay tax at the federal, state, or local level.
Common sources include income from municipal bonds, municipal bond funds, and from foreign investments. Nontaxable or tax-exempt interest refers to interest income that is not subject to income taxes, primarily at the federal level and not included in determining your AGI. It represents your total income from all sources (typically wages, business income, rental income, capital gains), minus certain deductions, which are allowed by the IRS. What is combined income?Ĭombined Income = adjusted gross income, or AGI + nontaxable Interest + 1/2 of Social Security benefits Adjusted gross incomeĪdjusted gross income is a key number used in calculating your federal income tax liability. Instead, there’s a relatively complicated formula that determines your “combined income,” and that in turn decides what share of your Social Security income is taxable.ĭepending on your combined income, you will either avoid owing taxes on your Social Security, see half your benefit taxable, or see up to 85% subject to tax. Still, figuring out how Social Security income affects your tax situation is not as simple as just adding your Social Security income to your regular income. If you receive significant income in addition to Social Security, chances are that at least a portion of your Social benefits will be taxed alongside your other income at ordinary income-tax rates.
Read on to see what you’re likely to owe and how you can take advantage of online tools, including several from the IRS to cut through the complexity and avoid unwanted surprises.
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Most people are surprised to find out their Social Security income is not free money,” says Garrett Watson, senior policy analyst at the Tax Foundation, a Washington, D.C., think tank. “The tax treatment of Social Security benefits is complicated and can trip up taxpayers and tax experts alike. High earners may see up to 85% of their benefits taxed and, unless your taxes are withheld, you may be surprised to find you need to write a check to the IRS quarterly. In fact, more than 50% of Social Security recipients pay taxes on their Social Security income and that percentage is growing every year. And, while if Social Security is your main source of income, it’s unlikely your share will be taxed, if you are even moderately wealthy there is a good chance Uncle Sam will claw back a portion of your check. That’s right, Social Security is taxable. Once you start receiving Social Security you may find the government turns around and takes back a big chunk of the money it just gave you. Well it’s a bit more complicated than that. You work at your job, pay your payroll taxes and when you retire, the government starts paying you in the form of Social Security, right?
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