What the Government Can Get from Your Social Security Check
For most retired people in America, Social Security is their most important source of income. Despite dire predictions about running out of money, the government would not consider letting that happen. There may be changes in withholding to beef up the system, but for the most part you can expect to draw social security in your retirement.
It is great to get that direct deposit every month, but this does not mean that everyone gets to keep it all. Between the federal government and some state governments, taxes are levied on some or all social security benefits.
Federal Taxation
There are provisions for federal taxation of social security benefits. One estimate is that approximately 50% of all social security recipients pay some federal taxes on that incomei. Will you be subject to taxes on Social Security? To find out you’ll need to calculate your provisional income, which is your non-Social Security taxable income plus 50% of your annual social security benefit amount. You may be taxed on up to 50% of your benefits if your provisional income falls between:
- $25,000 to $34,000 for single tax filers
- $32,000 to $44,000, for married couples filing jointly
It gets worse for higher incomes. You may be taxed on up to 85% of your benefits if your provisional income is greater than $34,000 as a single tax filer, or $44,000 as a married couple filing jointly.
With the average social security recipient getting only around $18,000/year, this would look like a non-problem. However, few can live on that income and they work or own businesses as well. For that average recipient, it would only take a $16,000 taxable income from their other income sources to result in 50% taxation of social security.
It is important to note that if you have multiple sources of income in retirement from work or investments, you should consult with a tax professional to determine which income must be considered in the provisional income calculation.
State Taxation
Depending on your state of residence, you could also be subject to state income taxation of your social security income. As of the end of 2021, 13 states fall into this category:
- Colorado
- Connecticut
- Kansas
- Minnesota
- Missouri
- Montana
- Nebraska
- New Mexico
- North Dakota
- Rhode Island
- Utah
- Vermont
- West Virginia
Some of these states use the IRS rules for taxation of social security income, but some have their own income rules. Check with your tax advisor to learn the rules if you live in one of these states. Higher income individuals should pay attention to these combined taxation levels, as they can take a significant chunk out of social security benefits.
Obviously, if you want to enjoy a secure and comfortable retirement lifestyle, you should start retirement planning no matter what your age or income level. There are planning steps you can take to change the taxability of some of your social security income in retirement.
i 50% of Social Security Recipients Do Not Get to Keep all of that Income – Fool.com