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Some people who receive Social Security benefits will have to pay federal income taxes on their benefits.  With good planning some of the tax can be minimized.  Here is a brief summary of Social Security taxation.

Lump Sum Death Benefit:

  • Income tax free

Retirement, Survivor and Disability benefits:

  • Income tax free

Unless income exceeds a specified base amount of: 

  • $25,000 if you are single or head of household.
  • $32,000 if you are married filing jointly.
  • $25,000 if you are married filing separately and lived apart from your spouse for all of the year.
  • $-0- if you are married filing separately and lived with your spouse at any time during the year.

To find out whether any of your benefits may be taxable, compare the base amount for your filing status with the total of:

  • One-half of your Social Security benefits, plus
  • All your other income, including tax-exempt interest. If you are married and file a joint return, you and your spouse must combine your incomes and your benefits to figure whether any of your combined benefits are taxable. Even if your spouse did not receive any benefits, you must add your spouse’s income to yours to figure whether any of your benefits are taxable.

If the total is more than your base amount, part of your benefits may be taxable.

How much is taxable depends on the total amount of your benefits and other income…the higher that total amount, the greater the taxable part of your benefits.

Generally, up to 50% of your benefits will be taxable. However, up to 85% of your benefits can be taxable if either of the following situations applies to you:

  1. The total of one-half of your benefits and all your other income is more than $34,000 ($44,000 if you are married filing jointly).
  2. You are married filing separately and lived with your spouse at any time during the year.

If part of your retirement income is paid or could be paid using a non-qualified fixed annuity with an exclusion ratio you might be able reduce your income taxes each year.

More information, including worksheets and examples, is available in IRS Publication 915: Social Security and Equivalent Railroad Retirement Benefits.

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You may ask questions in the comments or contact me privately:

Tim Barton  Chartered Financial Consultant

 

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