Tax season is right around the corner, and some taxpayers are already working hard in anticipation of getting their refund from the IRS as soon as possible.
What inevitably comes as a surprise to many of those who receive Social Security is that in some cases, they’ll have to include a portion of their benefits as taxable income.
As you get ready to prepare your 2019 tax return, you’ll need to understand the rules governing Social Security benefits and taxes to make sure you do the right thing at tax time.
How to figure out if you have to put Social Security income on your return
To be clear, many Social Security recipients don’t pay any tax at all on their benefits. The federal government looks at how much money you receive, both from Social Security and from other sources, and calculates what portion (if any) of your benefits need to go onto your tax return.
The starting point is what’s known as combined income. That number includes most of the income you receive outside Social Security, such as wage and salary income from full-time or part-time jobs, interest income on bank accounts and fixed-income securities, dividend income on stocks, and taxable distributions from pensions and retirement accounts. You even have to include some income that’s generally not taxed, such as tax-exempt municipal bond interest. Then, take the total and add in one-half of what you received from Social Security during the year.
The IRS has established thresholds of combined income above which a portion of your Social Security benefits can be subject to tax. There are two separate thresholds, and the amounts differ depending on your filing status.
For those with income above the lower threshold, up to half of Social Security benefits can be subject to tax. Above the higher threshold, the taxable part can go up to as much as 85%.
The calculations for determining exact amounts are complicated, but the good news is that you’ll often include far less than the 50% or 85% amounts. For instance, if you find yourself $100 above the 50% threshold in 2019, then the most you’ll have to include on your 2019 tax return is half of $100, or $50.
That’s true regardless of how much Social Security income you received during the year. To get help with this complex calculation, a Social Security income tax calculator can be a great tool.
More people will have to pay tax on Social Security over time
Those who’ve followed taxes and Social Security might notice that the numbers in the chart above haven’t changed from last year or the year before. That’s because the threshold numbers don’t have any inflation adjustment attached to them, so without action from lawmakers, they’ll stay the same forever.
As income levels increase, more people will potentially rise above the threshold numbers and have portions of their Social Security taxed. The impact won’t necessarily be huge all of a sudden, but it could gradually creep up and subject more and more income of certain individuals to tax as the years go by.
With most Social Security recipients having little or no control over the items that go into combined income, there’s no easy planning tip to avoid getting your benefits taxed. But with the threat of being audited if you don’t properly include your Social Security income on your tax return, it’s important to follow the rules and pay the IRS its share of your benefits.
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Source: The Motley Fool