Let’s get the bad news out of the way first: you may have to pay taxes on your Social Security benefits. That kind of sounds wrong, doesn’t it? Social Security is one of the things you’ve just spent forty years having taken out of your paycheck as extra taxes in the first place, and now you have to pay taxes on receiving your fair share of taxes you already paid? Totally backwards, right?
Well, yes and no. Social Security benefits are considered taxable income, and if you don’t pay those taxes, you’ll have to deal with the same problems that go with not paying other kinds of taxes. No one wants to engage tax resolution services in South Florida when you’re retired and just want to enjoy the sunshine, so you do need to take this possibility seriously. But don’t panic, because it isn’t quite as bad or unfair as it sounds. There’s an important part of the equation we haven’t talked about yet.
Social Security is meant to provide income for those who don’t have other income: namely, elderly and/or retired citizens who are unable to work or don’t want to work anymore. These people have paid their contribution to society and now have the ability to be repaid. But because Social Security benefits are awarded to millions of people on as equal a scale as possible, it’s a little unfair to allow someone who qualifies based on age to receive a certain amount of benefits while still working, while someone else of the same age gets the same amount of money while being unable to work.
Taxes on Social Security benefits are the IRS’s equalizer in this situation. If you receive Social Security benefits as your only income, you don’t have to pay taxes on them. But if you have additional income, and your combined income between Social Security and other income (specifically between other income, tax-exempt interest, and half your Social Security benefits) exceeds a certain amount, then your benefits will be taxable. Here’s how that works.
For starters, no one pays taxes on more than 85% of their Social Security benefits. So even if you’re still working a six-figure job or bringing in significant investment income after age 65, you won’t have to pay taxes on all of the Social Security you have coming to you. But the flip side of that is that if your combined income is more than $25,000 if you’re single or $32,000 if you’re married filing jointly, you’ll pay taxes on between 50% and 85% of your Social Security benefits. Which percentage depends on how much over those amounts you’re making. If you’re married filing separately, you’ll pay tax on Social Security benefits no matter how much your combined income was.
Each year, you’ll receive Form SSA-1099 from the IRS letting you know exactly how much you received in Social Security benefits the previous year. When you file your tax return, use this form to determine how much tax you may owe on those benefits. If it’s zero, great! But if not, you do need to make sure it gets paid.
Levy & Associates is available for free initial consultations. We’re happy to answer any questions you have about the audit process or address any concerns about your specific situation.
There’s never a good time to be audited, and the time-consuming process will take away from your business or family if you try to face it alone. Let us handle and coordinate communication, so you can return to your daily life.