If you are set to receive Social Security benefits, you may be wondering if the payments you receive will be subjected to taxes. While there is no one-size-fits-all answer to this question, you may be able to determine whether your benefits will be taxable by considering the other streams of income you expect to have in place during the year.
Situations in which Social Security Benefits Are Taxable
If Social Security benefits are a person's sole source of income for the entire tax year, his or her benefits will not be taxable. Therefore, in cases in which Social Security benefits are received in addition to investment income and earned income during the same tax year, Social Security benefits may be taxed.
To determine whether the additional income is enough to meet the taxation threshold, taxpayers must add half of their earned and investment income to the amount of Social Security benefits they received for the year. The resulting sum must then be compared to the applicable base amount provided by the IRS on Form SSA-1099. If the combined income is less than or equal to the base amount, your Social Security benefits will not be taxed.
Determining How Much of Your Benefits Are Taxable
If you find that, according to the formula in SSA-1099, your income exceeds the base amount, you will likely want to know exactly how much of your Social Security benefits will be taxed. Taxpayers may use the worksheet that is included in IRS Publication 915, Social Security and Equivalent Railroad Retirements Benefits, to help them calculate how much of their Social Security benefits are taxable. The Social Security benefits amount must also be reported on Line 20 of the taxpayer's Form 1040.
Reducing or Avoiding Social Security Benefits Tax
Social Security benefits recipients may avoid or reduce the taxable amount of their benefits by decreasing the amount of income from other sources. If you would like to learn how you reduce or avoid taxes on your Social Security benefits, you should contact a retirement planning specialist for professional advice. Accountants specializing in retirement planning are able to advise clients on the strategies that are available to them. These depend on the client’s marital status and other personal details, including age and income.
