Social security is defined as a safety net for the middle class and a lifeline for millions. For more than 60% of the Americans aged 65 and over, it offers 50% of their retirement income and is a guaranteed ling-long source of retirement security. Most of the people who are retired don’t need to pay state income taxes on their social security, but those who receive considerable income in addition to social security up to 85% are required to pay taxes. For calculating whether the benefits of your social security are taxable, you will need your SSA-1099 and W-2 form, along with other supporting documentation related to your income for the year.
According to the rules of IRS, you are required to pay taxes in case you:
- File for a state tax return as a separate and your collective income is $25,000-$34,000. You will be required to pay tax up to 50% of all your benefits. In case your wages are more than $34,000, then 85% of your benefits will be subjected to tax.
- In case you are filing as a combined return and you and your partner have a mutual income which is $32,000-$44,000, you need to pay up to 50% of tax on your benefits. If the amount is more than $44,000, then 85% of your benefits will be subjected to tax.
- In case you are married and filing a separate tax return then you also need to pay taxes on your benefits.
Due to these income thresholds, tax preparation companies often advise on ways to lower your provisional income. When you plan for retirement, it’s important to think in terms of multiyear projections. For instance, if you are expecting a big event such as business sales, you might be better off organizing this sale as an installment to be paid off over numerous years. It will help you evenly distribute your income and will keep you in the lower tax bracket, which will help you reduce the portion of your social security subjected to tax.
Planning for social security benefits is a complex process. It’s in your best interest to get tax help from tax preparation companies. By knowing facts of social security taxes you will put yourself ahead of the game and will have a better chance of receiving the benefits you deserve when retired.