Are Social Security Benefits Taxable?

Are Social Security Benefits Taxable?

For most people, Social Security retirement benefits are not taxable. However, about a third of people receiving retirement benefits must pay income tax on a portion of their benefits.

Basically, if your only income is from Social Security, then youre not going to owe any taxes on your benefits. However, if you have earned income from a job, or if you have substantial investment income, part of your benefits could be taxable.

There are two base amounts that determine if you will owe tax on your benefits or not. If your combined income is greater than $32,000 (married filing jointly) or $25,000 (single taxpayers), then up to 50% of your benefits could be taxed. If your combined income is greater than $44,000 (married filing jointly) or $34,000 (single), then you could pay taxes on up to 85% of your benefits.

Combined income for purposes of calculating whether your benefits are taxed is defined as pension income, wages, interest, dividends and other taxable income, plus 1/2 of your Social Security benefits. Also included is tax exempt interest income so taxpayers cant invest in municipal bonds to avoid paying taxes on their benefits.

Taxpayers who file married filing separately have to pay taxes on 85% of their benefits, in spite of of their other income. This is to avoid married taxpayers from filing separately to try to reduce their taxable income (and consequently the taxes paid on Social Security).

These base amounts were set in 1983 (and amended to add the 85% base amount in 1993). They have never been modificated for inflation so more and more retirees are finding that they have to pay tax on their retirement benefits each year. Since Social Security is facing financial difficulties thanks to the large number of baby boomers getting ready to retire, its not likely that these base amounts will be modificated any time soon. consequently, careful planning with your tax advisor is needed to minimize the amount of taxes you pay on your retirement benefits.

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