Social Security is more than just a monthly check; it is the result of years of hard work or a courtesy extended to you when you are unable to work. Many people rely on Social Security (SSA) as their primary source of income, but may be unaware that their entire income is taxed.
Yes, as you read it… You could owe money to the administration, and it all depends on how much each person earns. We’ll explain everything you need to know below.
When do you need to file your benefits?
Beneficiaries who rely solely on Social Security are unlikely to be required to file taxes. But what about the combined income? That will be subject to IRS criteria, so if you receive pensions, 401(k) distributions, investments, or other forms of part-time work and exceed the IRS’s limits. Here are several examples:
- For example, if you are single and over 65, you should not file taxes if your gross income is less than $16,550.
- For married couples filing jointly and both are over 65, the limit is $32,300.
What is combined income?
A formula that the IRS follows to determine whether or not the money you receive is subject to taxes.
How is it calculated?
- Adjusted gross income (AGI): wages, pensions, self-employment income, rents, taxable interest, dividends, and any other taxable income.
- Tax-exempt interest: interest generated by municipal bonds and other financial instruments that do not pay federal taxes.
- Half of Social Security benefits: 50% of the annual payments received from Social Security are added.
- Here’s an example:
If a retiree receives (annually) $25,000 from Social Security, $15,000 from a pension, and about $2,000 in other types of bonuses, he would end up receiving $27,000 based on this calculation, so up to 50% of his income could be subject to taxes (exceeding the $25,000 limit imposed by the IRS).
But when are they taxed?
For singles with a combined income of $25,000 to $34,000, up to 50% of their benefits may be taxable. If it exceeds $34,000, up to 85% may be taxed.
For couples filing jointly with a combined income of $32,000 to $44,000, up to 50% of benefits may be taxable. If your income exceeds $44,000, you could face a tax rate of up to 85%.
What happens if I decide not to pay my taxes
Nobody likes paying taxes, but this money “taken from us” is essential to keep public services running, so it is our obligation as citizens to pay taxes.
- If you don’t, the IRS will send you a notice with the outstanding amount you must pay.
- If not resolved, interest and penalties for not filing on time could accrue, which could reach up to 25% of the amount owed.
In extreme cases, the IRS may seize up to 15% of your Social Security payments to cover the tax debt, so it is almost preferable to pay on time.
Can I minimize or avoid taxes?
No, but you can reduce your tax impact in the following ways:
- If you have additional income, distribute it strategically so that it doesn’t exceed IRS thresholds.
- Take advantage of Roth IRA distribution accounts.
- You can choose to have the IRS withhold a percentage of your payments so you don’t get a surprise at the end of the tax year.
Don’t forget that it is our responsibility as citizens to pay taxes to the administration, and that planning ahead of time is essential to avoid being caught off guard!
