What To Do: Do The Math Before Retiring
As you’re approaching retirement, check your earnings statement first to make sure you have enough credits to qualify for Social Security. If you don’t already have 35 years of earnings, consider whether working an additional year or two could help boost your Social Security benefits.
For example, if you worked a first career where you weren’t covered by Social Security, working for an extra year or two might ensure you qualify for Social Security benefits or boost your monthly benefit amount.
Taxable Social Security Benefits Calculator
Since retirement income is all about the dollars you get to keep in your pocket, its helpful to know how much of your Social Security benefits youll have to give up in taxes.
Thats what this taxable Social Security benefits calculator is designed to do: Give you an estimate of how much youll have to pay in taxes on your monthly benefits.
Before you use this calculator, it may be helpful for you to read a few of my articles on the taxation of Social Security in conjunction with using this calculator.
About The Author: Joe Elsasser Cfp
Joe Elsasser, CFP® is the founder and president of Covisum®, a financial tech company focused on creating software solutions, practice management and marketing resources to help advisers and financial institutions grow and improve lives through better retirement decisions. Covisum helps financial advisers serving mass-affluent clients in or near retirement and powers some of the nations largest financial planning institutions.
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Paying Taxes On Social Security
You should get a Social Security Benefit Statement each January detailing the benefits that you received during the previous tax year. You can use it to determine whether you owe federal income tax on your benefits. The information is available online if you enroll on the Social Security website.
If you owe taxes on your Social Security benefits, you can make quarterly estimated tax payments to the IRS or have federal taxes withheld from your payouts before you receive them.
Withdraw Taxable Income Before Retirement
Another way to minimize your taxable income when drawing Social Security is to maximize, or at least increase, your taxable income in the years before you begin to receive benefits.
You could be in your peak earning years between ages 59½ and retirement age. Take a chunk of money out of your retirement account and pay the taxes on it. You can use it later on without pushing up your taxable income.
For example, you could withdraw funds a little earlyor take distributions, in tax jargonfrom your tax-sheltered retirement accounts, such as IRAs and 401s. You can make penalty-free distributions after age 59½. This means that you avoid being dinged for making these withdrawals too early, but you must still pay income tax on the amount that you withdraw.
Since the withdrawals are taxable , they must be planned carefully with an eye on the other taxes that you will pay that year. The goal is to pay less in tax by making more withdrawals during this preSocial Security period than you would after you begin to draw benefits. That requires considering the total tax bite from withdrawals, Social Security benefits, and any other sources. Be mindful, too, that at age 72, youre required to take RMDs from these accounts, so you need to plan for those mandatory withdrawals.
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What To Do: Create A Well
Social Security can be a great supplement to other sources of retirement income, but it should not be your only source. Make sure you have a healthy nest egg saved in a 401 or IRA, and ideally set yourself up to have passive income streams that will continue to pay out in your post-9-to-5 life.
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If You Earn Enough Money For Your Benefits To Be Taxable You Could End Up Paying The Highest Income Taxes In The Country
Social Security benefits are tax free unless you earn too much income during the year. To know whether you might be subject to such taxes you have to figure your “combined income.” This is actually quite easy: Simply add one-half of the total Social Security you received during the year to all your other income, including any tax-exempt interest .
You’ll have to pay tax on part of your benefits if your combined income exceeds these thresholds:
- $32,000 if you’re married and file a joint tax return , or
- $25,000 if you’re single.
If a married couple files their taxes separately, the threshold is reduced to zerothey always have to pay taxes on their benefits. The only exception is if they did not live together at any time during the year in this event the $25,000 threshold applies.
This applies to all types of Social Security benefits: disability, retirement, dependents, and survivors benefits.
How much of your Social Security benefits will be taxed depends on just how high your combined income is.
Individual filers. If you file a federal tax return as an individual and your combined income is between $25,000 and $34,000, you have to pay income tax on up to 50% of your Social Security benefits. If your income is above $34,000, up to 85% of your Social Security benefits is subject to income tax.
Once you start receiving Social Security benefits, to keep your income below the applicable threshold, or at least as low as possible, you should:
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To Find Out If Their Benefits Are Taxable Taxpayers Should:
- Take one half of the Social Security money they collected during the year and add it to their other income.
Other income includes pensions, wages, interest, dividends and capital gains.
- If they are single and that total comes to more than $25,000, then part of their Social Security benefits may be taxable.
- If they are married filing jointly, they should take half of their Social Security, plus half of their spouse’s Social Security, and add that to all their combined income. If that total is more than $32,000, then part of their Social Security may be taxable.
How Do I Determine If My Social Security Is Taxable
Add up your gross income for the year, including Social Security. If you have little or no income in addition to your Social Security, then you wont owe taxes on it. If youre an individual filer and had at least $25,000 in gross income including Social Security for the year, then up to 50% of your Social Security benefits may be taxable. For a couple filing jointly, the minimum is $32,000. If your gross income is $34,000 or more , then up to 85% may be taxable.
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You Forfeit Up To 30% Of Your Benefits By Claiming Early
The full retirement age is 67, but if you claim at 66 and 11 months, youll receive only 99.4% of your full payment. If you claim at 65, youll receive just 86.7% of your benefits. You can claim as young as 62, but if you do, youll receive only 70% of your full payment for life, if you dont withdraw your claim within a year.
Tips For Saving On Taxes In Retirement
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Financial advisors can offer valuable guidance and insight into retiree taxes. Finding a qualified financial advisor doesnt have to be hard. Finding a qualified financial advisor doesnt have to be hard. SmartAssets free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If youre ready to find an advisor who can help you achieve your financial goals, get started now.
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What you pay in taxes during your retirement will depend on how retirement friendly your state is. So if you want to decrease tax bite, consider moving to a state with fewer taxes that affect retirees.
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Another way to save in retirement is to downsize your home. Moving into a smaller home could lower your property taxes and it could also lower your other housing costs.
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What To Do: Proactively Plan For Taxes
Engaging in tax planning can help ensure you aren’t paying the IRS any more of your Social Security benefits than you have to.
For example, if you’re planning to donate money to charity, consider a qualified charitable distribution to satisfy your required minimum distribution from an IRA rather than using other funds. That way, the distribution doesn’t add to your taxable income and might make more of your Social Security benefits count as taxable income.
Survivor Benefits Are Complicated
Survivor benefits are complicated. In most cases, you will have to go to a Social Security office to figure out if you or the child is eligible and how much the benefits will be. Especially if youre working and under full retirement age, get some help so you dont miss out on benefits that are rightfully yours.
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How Much Is Taxable
Generally, up to 50% of benefits will be taxable. However, up to 85% of benefits can be taxable if either of the following situations applies.
- The total of one-half of the benefits and all other income is more than $34,000 .
- You are filing Married Filing Separately and lived with your spouse at any time during the year.
Who is taxed. Benefits are included in the taxable income for the person who has the legal right to receive the benefits.
Example: Lisa receives Social Security benefits as a surviving spouse who is caring for two dependent children, Christopher, age 9, and Michelle, age 7. As dependents of their deceased father, Christopher and Michelle also receive Social Security benefits. The benefits for Christopher and Michelle are made payable to Lisa. When calculating the taxable portion of the benefits received, Lisa uses only the amount paid for her benefit.
The amounts paid for Christopher and Michelle must be added to each childâs other income to see whether any of those benefits are taxable to either of the children.
Withholding. You can choose to have federal income tax withheld from Social Security or Railroad Retirement benefits by completing Form W-4V, Voluntary Withholding Request.
Reporting American Social Security Income In Canada
If you are an American citizen who lives in Canada, and you receive Social Security payments, you must report them on your income tax return. Some of your payments may also qualify for an exemption.
Reporting Your Social Security Income
Report your Social Security payments on line 11500 of your Canadian income tax return. You should also include payments from your individual retirement account on this line. If you receive any Canadian pension or superannuation benefits or other foreign pensions, include them in the total on line 11500.
Converting Your Pension Income to Canadian Currency
Do not report your American Social Security or pension payments in U.S. dollars. Instead, convert them to Canadian dollars. Use the Bank of Canada exchange rate from the day you received the pension. If you received the pension on multiple days throughout the year, use the average annual rate published by the bank.
Claiming Exempt Foreign Income
Under the terms of the Canadian/U.S. tax treaty, you do not have to pay Canadian income tax on the entirety of your Social Security payments. Instead, you may claim an exemption on 15 percent of this income. Multiply the amount of Social Security benefits reported on line 11500 by 0.15, and note the result on line 25600 of your income tax return.
You may include Medicare premiums when calculating your exemption, but you cannot include other types of foreign income when calculating your exemption.
The 50 Percent Exemption
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Pensions And Other Factors
If you receive a pension, say as a teacher or as a union worker, this has the potential to affect your retirement benefits. If you have a pension from a job for which you did not pay Social Security taxes, this may lower your benefit.
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If you had a government pension offset, meaning you had a pension from a government job for which you did not pay Social Security taxes, this could affect your benefit. This applies to a spouse, widow or widower of someone who held the position.
The Mistake: Not Checking Your Earnings Record
Even if you’re decades away from claiming Social Security, you could be making a big mistake if you don’t keep track of your yearly earnings. The amount of Social Security benefits you receive depends on your earnings record, so if that record is incorrect, you might not receive the benefits you’re entitled to.
Errors can occur for a variety of reasons, including an employer reporting an incorrect amount of earnings or your earnings not showing up because you got married or divorced and your name change has not been processed correctly.
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Who’s Eligible For Social Security Disability Insurance
To qualify for Social Security Disability Insurance, you must meet certain conditions.
First, you must meet a recent work test. This means earning at least a minimum amount per calendar quarter and working long enough. For each quarter you work and earn at least $1,470 , you receive one Social Security credit.
Meeting the recent work test requirement depends on your age. It also requires different amounts of Social Security credits.
- Under age 24: You meet the recent work test if you earned 6 credits in the 3-year period when your disability began.
- Age 24 to 31: In general, you may qualify if you have credits for working half the time between age 21 and becoming disabled.
- Age 31 or older: You’ll need to have earned at least 20 credits in the 10-year period immediately before becoming disabled.
Second, review the Social Security Administration’s table to determine if you meet the duration work test based on your age and when your disability began.
Third, you must be unable to work because of a medical condition that has lasted a year, is expected to last at least one year, or is expected to result in death. This means not having a partial disability and meeting the Social Security Administration’s definition of disabled.
Fourth, you must be younger than your full retirement age as defined by Social Security.
How To Calculate Whether Your Social Security Benefits Are Taxable
To calculate whether your social security benefits are taxable, you will need to know if your combined income falls within the IRS threshold Table of Contents: How much of my social security is taxable in 2022? How much of my social security income is taxable? At what age do you stop paying taxes on social
To calculate whether your social security benefits are taxable, you will need to know if your combined income falls within the IRS threshold
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Other Things To Watch Out For
While everyone likes to minimize their taxes, especially ones that you can avoid without too much legwork, its important that you keep things in perspective.
Tax strategy should be part of your overall financial planning, says Crane. Dont let tax strategy be the tail that wags the dog.
In other words, make the financial moves that maximize your after-tax income, but dont make minimizing taxes your only goal. After all, those who earn no income also pay no taxes but earning no income is not a sensible financial path. For example, it can be better to find ways to maximize your Social Security benefits rather than minimizing your taxes.
And it could be financially smart to first avoid some of the biggest Social Security blunders.
Dont forget that these rules apply to minimizing your tax at the federal level, but your state may tax your Social Security benefit. The laws differ by state, so its important to investigate how your state treats Social Security.
There really arent any tricks, you just have to be careful with your interest and dividends, says Paul Miller, CPA, of Miller & Company in the New York City area.
How Much Of My Social Security Income Is Taxable
Currently, the social security income that is taxable can never be more than 85% of your Social Security income. With that in mind, different circumstances will lead to you needing to pay different amounts of tax on your social security income.
For example, for single filers, if your combined income when filing taxes falls between $25,00 and $34,000 you will be called to pay taxes for up to 50% of your Social Security Benefits. If your combined income surpasses $34,000 then you could be made to pay for up to 85% of your Social Security benefits.
These limits change for married couples, you are only called to pay tax for up to 50% of their Social Security Benefits if they have a combined income between $32,000 and $44,000. If their combined income surpasses the $44,000 mark then they need to pay taxes for up to 85% of their social security income.
Therefore, knowing your specific circumstance will allow you to better determine what part of your Social Security income you will be called to pay taxes on. No matter how much your income is you will never be made to pay income taxes on more than 85% of your social security income.
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