Q & A
Will I owe income tax on my Social Security benefits?
Complete Question: The first time I got Social Security benefits was in November, 2013, so when I filed for my taxes last year, my Social Security benefits weren’t much of a concern. Now I’m looking at a full year of benefits when I file my taxes and I don’t know what to expect. I probably shouldn’t have waited this long to file, but I keep hearing different answers. Some people say you don’t owe taxes on Social Security benefits, some people say you only owe a little, and some say you owe a lot. I don’t know who to believe and I just don’t want to be blind-sided. Can you help?
Answer: There is a possibility that you will owe federal income tax on your Social Security benefits – they can tax anywhere between 0% and 85% of your total annual benefit. Typically the amount of your benefit that is taxed (if any) has a lot to do with how much other income you have because the IRS looks at your “combined income” for the year. The Social Security Administration (SSA) defines “combined income” as your Modified Adjusted Gross Income (MAGI) + 1/2 your Social Security benefit. (MAGI is equal to your Adjusted Gross Income + non-taxable interest income). You should have received a 1099 from the SSA that tells you how much you received in Social Security benefits for 2014. So to determine your combined income, add half of that amount to your MAGI. How much of your benefit is taxed is not only based on your combined income, but also your marital status. Therefore, you can get a general idea of whether or not you will owe federal income tax on your Social Security benefits based on the following:
You will probably not owe income tax on your Social Security benefits if:
a) You are single and file an individual tax return, and your “combined income” is under $25,000.
b) You are married and file jointly, and your “combined income” is less than $32,000.
You will probably owe income tax on up to 50% of your Social Security benefits if:
a) You are single and file an individual tax return, and your “combined income” is between $25,000 and $34,000
b) You are married and file jointly, and your “combined income” is between $32,000 and $44,000.
If your combined income is more than the above amounts, you will likely owe income tax on between 50% and 85% of your Social Security benefits. If you are married and file separately, you will probably pay income taxes on some portion of your benefits. Note that under no circumstances will someone pay income tax on more than 85% of their benefit.
Also be aware that these thresholds refer to federal income tax. Every state has their own rules as to whether or not they tax Social Security benefits. In general, if the state does not have income tax on regular income, it will not tax Social Security benefits, but there are a lot more states than that who chose not to tax Social Security income. In fact, the majority of states do not impose an income tax on your Social Security benefit. The states that do tax benefits may use the same formula and thresholds as the federal government, or they may have their own formula and income thresholds. You need to check with your state of residence to find out its current taxation laws, especially since some of them are in the process of trying to pass legislation that will stop the taxation of Social Security income.