Do You Pay Taxes On Social
For many in retirement there is a shock when they find out that they do have to pay taxes on Social Security benefits and unfortunately this is nothing new.Taxing Social Security benefits began back in 1983 when Congress altered the Amendments of the Social Security Act to have a portion of benefits subject to federal income taxation.
The rational was simple: to keep the Social Security program solvent there had to be a change, so why not tax the rich.At the time this novel concept was only going to be an issue for less than 5% of all retirees, but with all “good intentions” set by Congress today there over 40% of retirees that are paying some tax on their benefits. The good news about being subject to taxes on your benefits is that, right now, only up to 85% of your Social Security benefit can be taxable. We are stressing right now, because there is always Congress and Congress is looking for money. According to Social Security.gov to help save the Social Security program there are proposals to increase the taxation of benefits even higher than what they are already at.
How to figure out if I will pay taxes on Social Security benefits?
There are a few factors that determine if you will have to pay taxes on your Social Security benefit and they are:
Factor #1) Your other taxable income:
Believe it or not if you happen to have more income than a certain amount you will have to pay taxes on your Social Security benefit.If you have very little reportable income, other than your Social Security benefit there is a great chance that this tax will never affect you.Again, it is all about reportable income and what the IRS considers to be reportable is:½ of your annual Social Security benefit, Your adjusted gross income (AGI) andTax-exempt interest you have as income.
What does AGI include as income?
AGI is everything on line 11 of the 2022 IRS form 1040 which includes income from sources like: Wages, Capital Gains, Rental and Pension Income, Interest and Distributions from investments like Traditional 401(k)’s/IRA’s/403(b)’s. For a comprehensive list of what counts as income click here. Basically, if your reportable income in retirement is not from Roth Accounts, Health Savings Accounts (HSA’s), 401(h) plans, Non-Qualified Annuities, Life Insurance or Home Loans then it will count towards your AGI.Pro tip: If you have any assets in a Traditional 401(k) or investments vehicles where you delay paying taxes until retirement you will most likely be paying taxes on your Social Security benefit.
What does Tax-Exempt Interest include as income?
According to the IRS is includes “any tax-exempt original issue discount (OID)), such as from municipal bonds.”You can find this type of income on line 2a of the 2022 IRS tax form 1040.A good rule to follow when it comes to paying taxes on your Social Security benefit:If you are trying to avoid taxes while you are young, working and can afford to do so you will most likely pay more taxes later in retirement, when you are old, not working and need the money.
Factor #2: How you file your taxes with the IRS
There is mathematical equation to determine if you are even eligible to be subject to taxes on your Social Security benefit and it all comes down if you file your taxes as an Individual of Jointly.