Many taxpayers are often shocked to learn that their Social Security benefits can be taxed by the federal government. Taxes on Social Security benefits are typically determined by income levels. In addition, there are currently 12 U.S. states that tax Social Security benefits to some extent. Here’s a brief overview of how Social Security income is taxed, both at the federal and state level.
Will My Social Security Income Be Taxed?
According to the IRS, the easiest way to determine if your Social Security benefits are taxable is to add half of your annual Social Security income and add it to all other income, plus all tax-exempt interest, to find your total combined income. If your combined income is above the IRS base amount, you’ll be required to pay some tax. The 2022 combined income limit for single filers, heads of household, or qualifying widows with dependent children is $25,000. The limit for joint filers is $32,000. Married couples who file separately will likely need to pay taxes on Social Security income.
How Much Will I Be Taxed?
In 2022, 50% of a taxpayer’s benefits can be taxed if they meet any of the following criteria:
- Filing single, head of household, or qualifying widow with income between $25,000 and $34,000
- Married filing separately and lived separately from their spouse for the entire 2021 year, and earned between $25,000 and $34,000
- Married filing jointly with income between $32,000 and $44,000
If the taxpayer fits any one of these criteria, then 50% of their benefits will be subject to tax. However, the actual amount will be the lesser of either:
- Half of their annual Social Security benefits, or
- Half the difference between their combined income and the IRS base amount
For example, let’s say a single filer had an annual Social Security income of $20,000 and a combined income of $27,000. Half of their annual Social Security income would be $10,000. Half the difference between their combined income and the IRS base amount of $25,000 would be $1,000.
($27,000 – $25,000) / 2 = $1,000
The taxable benefits would be the lesser of the two amounts, which is $1,000.
If the taxpayer earns more than the IRS base amount, the tax rate is higher. In 2022, 85% of a taxpayer’s benefits can be taxable if they are:
- Filing single, head of household, or qualifying widow and earn more than $34,000
- Married filing jointly and earn more than $44,000
- Married filing separately, and lived separately from their spouse for the entire 2021 year, and earned more than $34,000
- Married filing separately and lived with their spouse at any time during 2021
Does My State Tax My Social Security Benefits?
In addition to federal taxes, residents of the following 12 states may also have to pay state taxes:
- Minnesota and Utah: Tax according to federal rules
- Colorado, Connecticut, Kansas, Missouri, Montana, Nebraska, New Mexico, Rhode Island, Vermont, and West Virginia: Tax according to federal rules but offer deductions or exemptions based on age or income
Tax Relief for Social Security Recipients
Being taxed on Social Security benefits can be unexpected. Generally, the benefits won’t be taxed if it’s a taxpayer’s only source of income, but with limited income during retirement age, it’s important to be prepared. Taxes on these benefits can be paid through quarterly estimated tax payments. Federal tax can even be withheld from these benefits. In any case, all Social Security recipients should ensure that they remain compliant and report their Social Security earnings during tax time. If you need tax help, give us a call at 800-536-0734 for a free consultation with one of our tax professionals.