August 23, 2009

Taxes on Social Security benefits in Retirement

Did you know that you might have to pay taxes on up to 85% of your social security retirement benefits? If your income level exceeds certain threshold then your social security pension could be taxable.

How do you know if your social security benefits are taxable? First you combine half your social security and other taxable income. Then check to see if its above the thresholds.

If you're single the threshold is $25,000 and if you're married its $32,000. If you owe more than that you could have up to 50% or 85% of your social security subject to tax. There are a couple thresholds to determine if any of your social security is taxable and if so how much is subject to taxes. Heres a table breaking it down for single or married filers:

Single, head of householdMarried filing jointAmount of SS Taxable
$25,000 or less$32,000 or less0%
$25,000 to $34,000$32,000 to $44,000up to 50%
over $34,000over $44,000up to 85%

Lets look at some examples.

Example 1: A single woman makes $10,000 from a part time job and has $18,000 in social security benefits. She also has a pension with income of $8,000. Half her SS is $9,000 and her other income is $18,000 so in total she would be at $27,000. That is $2,000 above the threshold. 50% of that $2,000 is subject to taxes. So $1,000 of her social security is subject to income tax.

Example 2: A married couple has $15,000 from taxable IRA and pensions and gets $20,000 from social security. Half their SS plus other income is $10,000 + $15,000 or $25,000 total. That is below the $32,000 threshold for a married couple so none of their social security is taxable.

Example 3: A married couple has social security benefits of $24,000. They also have an IRA with benefits of $20,000, interest income of $5,000 and business income of $30,000. Half their SS is $12,000 and their other income is $20,000 + $5,000 + $30,000 for a total of $67,000. That puts them above the threshold for 85% tax level so 85% of their social security is taxable. They owe tax on 85% of $24,000 or $20,400.

Even if some your social security is subject to income tax, that won't mean you necessarily owe taxes. You will still get your standard or itemized deductible as well as your personal exemptions.

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