If you receive or are planning on receiving Social Security benefits as part of your retirement, you may be surprised to see that you will pay taxes on them. It’s not a surprise to those of us who do tax preparation and tax returns as our occupation. Washington is infamous for double, and even at times triple or quadrupling, taxing the money you earn, spend, invest, are born into, or die and leave someone. It’s no different for Social Security benefits, and we will tell you more below.
Social Security Benefits Tax at the Federal Level
All retirement income, which includes Social Security benefits, is taxed differently than salary and investment income by the IRS. It maintains its own criteria for Social Security benefits taxation that can be a real burden for struggling seniors.
For the most part, seniors are required to pay federal income taxes on their Social Security benefits if they are shown to earn a substantial amount of income from another source. This can include pay from a part time job, income from a business, investments, dividends, rental income, etc. The IRS will tally how much of the Social Security Benefits will be taxed by adding the combined income including adjusted gross income, non-taxable interest, and 50% of the Social Security Benefits. In fact, single taxpayers only have to earn $25,000 in all of these for the IRS to eyeball up to half of your Social Security benefits. For those who make over $34,000 per year in combined income, the IRS can take up to 85% of your Social Security benefits in taxes.
Those who file jointly and earn between $32,000 to $44,000, they are eligible for up to half of their benefits being taxed, while those who file jointly and earn over $44,000 may be taxed at 85%.
Considering the average American salary is about $50,000 per year and probably higher for those in their sixties and seventies, this policy can be disastrous. The obvious downside is that it encourages seniors and other retirees to fully retire, whether they want to or not, as they may be severely penalized for contributing to society.
Social Security Benefits Tax at the State Level
Along with the federal taxes seniors may have to pay on their Social Security benefits via their state government. There are an additional thirteen states that also dip into Social Security benefits via a tax. (My clients and I count our lucky stars that Texas is not one of them.) The good news is there are exemptions that may vary considerably from state to state.
Colorado – Those 65 and older can earn $24,000 in total retirement income and not be taxed.
Connecticut – Those who earn less than $50,000 filing single or $60,000 filing jointly are not taxed.
Kansas – Those who earn less than $75,000 are not taxed.
Minnesota – Same rates as federal taxes on Social Security.
Missouri – Those who earn less than $85,000 filing single or $100,000 filing jointly are not taxed.
Montana – Those who earn less than $25,000 filing single or $32,000 filing jointly are not taxed.
Nebraska – Same rates as federal taxes on Social Security.
New Mexico – $8,000 exemption on total retirement income for all.
North Dakota – Same rates as federal taxes on Social Security.
Rhode Island – Social Security benefits are tax exempt for those earning under $80,000 filing single and $100,000 filing jointly
Utah – Some individuals can qualify for an exemption of tax on Social Security benefits of up to $450.
Vermont – Same rates as federal taxes on Social Security.
West Virginia – Same rates as federal taxes on Social Security.
To learn more about Social Security benefits and their taxes, click here to go to the IRS site with more.
Tax Preparation and Tax Returns in Houston
And if you live in the Houston area and would like assistance in your Social Security Benefits Tax preparation and tax return, please contact me.