How Do You Calculate And Report Taxable Benefits
The IRS provides worksheets to help you calculate how much of your Social Security benefits to include as taxable income. The worksheet you use will depend on your tax situation. The most commonly used worksheet is for Form 1040 filers who do not have foreign earned income, foreign housing exclusion or deduction, or US savings bond interest exclusion and do not contribute to an IRA while at the same time having you or your spouse covered by a retirement plan at work. A copy of this worksheet can be found in the IRS packet of Forms and Instructions sent to most taxpayers.
The worksheet for those with foreign income or filing Form 4563, Exclusion of Incomefor Bona Fide Residents of Samoa, or Form 8815, Exclusion of Interest from Series EE orI US Savings Bonds Issued After 1989, or with income from Puerto Rico is found in IRS Publication 915, Social Security and Equivalent Railroad Retirement Benefits.
The worksheets you must use if you contribute to a traditional IRA and you or your spouse are covered by a retirement plan at work or through self-employment are found in IRS Publication 590, Individual Retirement Arrangements . These worksheets are fairly complicated and have lots of instructions, but they also are used to calculate how much, if any, of your IRA contribution is deductible.
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How Much Are Social Security Taxes
Together, the Social Security and Medicare programs make up the;Federal Insurance Contributions Act tax rate of 15.3%. Currently, the Social Security tax is 12.4% half of which is paid by the employer, with the other 6.2% paid by the worker through payroll withholding. For Medicare, that tax is a combined 2.9%, split between the employee and employer. .
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The Impact Of Roth Iras
If youre concerned about your income tax burden in retirement, consider saving in a Roth IRA. With a Roth IRA, you save after-tax dollars. Because you pay taxes on the money before contributing it to your Roth IRA, you will not pay any taxes when you withdraw your contributions. You also do not have to withdraw the funds on any specific schedule after you retire. This differs from traditional IRAs and 401 plans, which require you to begin withdrawing money once you reach 72 years old, or 70.5 if you were born before July 1, 1949.
So, when you calculate your combined income for Social Security tax purposes, your withdrawals from a Roth IRA wont count as part of that income. That could make a Roth IRA a great way to increase your retirement income without increasing your taxes in retirement.
Another thing to note is that many retirement plans allow individuals, aged 50 years or older, to make annual catch-up contributions. For 2021, you can make catch-up contributions up to $1,000. These must be made by the due date of your tax return. You have until April 15, 2022 to make the $1,000 catch-up contribution apply to your 2021 Roth IRA contribution total.
Also Check: How To Buy Tax Lien Properties In California
Ways To Avoid Taxes On Benefits
The simplest way to keep your Social Security benefits free from income tax is to keep your total combined income so low it falls below the thresholds to pay tax. However, few choose to live in poverty just to minimize their taxes.
A more realistic goal is to limit how much tax you owe. Here’s a rundown of three solutions:
Survivor Benefits Are Complicated
Survivor benefits are complicated. In most cases, you will have to go to a Social Security office to figure out if you or the child is eligible and how much the benefits will be. Especially if youre working and under full retirement age, get some help so you dont miss out on benefits that are rightfully yours.
Do I Need To File Even If Im Not Required To By Filing Status Age And Income Level
In some cases, yesyou will still need to le a tax return if any of the following apply:
- You owe any taxes, such as alternative minimum tax, taxes on a retirement plan distribution, household employment taxes, and Social Security and Medicare taxes that were not withheld from income.
- You received a distribution from a health savings account, Archer MSA, or Medicare Advantage MSA.
- You had at least $400 in self-employment income.
- You earned $108.28 or more from a church or qualified church-controlled organization that is exempt from employer Social Security and Medicare taxes.
- You received an advance payment of the Premium Tax Credit for health insurance bought from a health insurance marketplace. You should receive Form 1095-A with the amount of the advance payments.
- Advance payments of the health coverage tax credit were made for you, your spouse or a dependent. You should receive Form 1099-H with the amount of the advance payments. Note: For tax year 2020, any excess amount of advance premium tax credit payments received doesnt have to be repaid, according to the American Rescue Plan .
- You were required to file Form 965 for a triggering event or Form 965-A for an elected installment payment.
Other Things To Watch Out For
While everyone likes to minimize their taxes, especially ones that you can avoid without too much legwork, its important that you keep things in perspective.
Tax strategy should be part of your overall financial planning, says Crane. Dont let tax strategy be the tail that wags the dog.
In other words, make the financial moves that maximize your after-tax income, but dont make minimizing taxes your only goal. After all, those who earn no income also pay no taxes but earning no income is not a sensible financial path. For example, it can be better to find ways to maximize your Social Security benefits rather than minimizing your taxes.
And it could be financially smart to first avoid some of the biggest Social Security blunders.
Dont forget that these rules apply to minimizing your tax at the federal level, but your state may tax your Social Security benefit. The laws differ by state, so its important to investigate how your state treats Social Security.
There really arent any tricks, you just have to be careful with your interest and dividends, says Paul Miller, CPA, of Miller & Company in the New York City area.
Why The Problem Could Get Worse
One oddity about Social Security taxation is that the threshold numbers above aren’t indexed for inflation. Instead, they’ve remained basically unchanged since their enactment. Meanwhile, income levels have gradually increased, and as that’s happened, more people have to pay taxes on a portion of their Social Security every year.
Unfortunately, since you have limited control over income, it’s hard to do much planning to affect the taxation of your Social Security. Just about the only thing you can do is to try to time taxable distributions from retirement accounts in order to keep your combined income under the thresholds, or to put off getting Social Security until your other income won’t be as large. Because so many people don’t have that level of financial flexibility, more and more taxpayers will find their Social Security benefits subject to tax as time goes by.
Giving Up A Portion Of Your Benefits To The Irs Is A Sad Fact Of Life For Many
Nobody likes to pay taxes, but it’s especially hard for older Americans to deal with an unexpected tax bill. Given how many people live primarily on fixed incomes from Social Security and other sources, many don’t have much extra cash to pay any more than absolutely necessary to the IRS.
Unfortunately, one thing that many retirees find surprising is that in some cases, they have to include Social Security benefits on their tax returns. Some people are fortunate enough not to have to pay any income taxes on their reported benefits, but others might face higher tax bills than they expect solely because of the way the federal government taxes Social Security.
How Much Of Your Social Security Income Is Taxable
Social Security payments have been subject to taxation above certain income limits since 1983. No inflation adjustments have been made to those limits since then, so most people who receive Social Security benefits and have other sources of income pay some taxes on the benefits.
No taxpayer, regardless of income, has all of their Social Security benefits taxed. The top-level is 85% of the total benefit. Here’s how the Internal Revenue Service calculates how much is taxable:
- The calculation begins with your adjusted gross income from Social Security and all other sources. That may include wages,;self-employed earnings, interest, dividends,;required minimum distributions from qualified retirement accounts,;and any other taxable income.
- Then, any tax-exempt;interest is added.
- If that total exceeds the minimum taxable levels, at least half of your Social Security benefits will be considered taxable income. You then have to take the standard deduction or itemize deductions in order to arrive at your net income.
The amount you owe depends on precisely where that number lands in the federal income tax tables.
Combined income = your adjusted gross income + nontaxable interest + half of your Social Security benefits
Coverage And Social Security Taxes
Before the agreement, employees, employers and self-employed persons could, under certain circumstances, be required to pay Social Security taxes to both the United States and Canada for the same work.
Under the agreement, if you work as an employee in the United;States, you normally will be covered by the United States, and you and your employer will pay Social Security taxes only to the United States. If you work as an employee in Canada, you normally will be covered by Canada, and you and your employer will pay Social Security taxes only to Canada.
On the other hand, if your employer sends you from one country to work for that employer or an affiliate in the other country for five years or less, you will continue to be covered by your home country and you will be exempt from coverage in the other country. For example, if a U.S. company sends an employee to work for that employer or an affiliate in Canada for no more than five years, the employer and the employee will continue to pay only U.S. Social Security taxes and will not have to pay in Canada. Even if your occupation requires you to make frequent short trips from one country to the other over a period of more than five years, each trip can be considered separately so that you remain covered only by the country from which you are sent.
If you are self-employed and residing in the United States or Canada, you generally will be covered and taxed only by the country where you reside.
Working While Claiming Social Security
A whopping 34% of women and 61% of men claim Social Security at 62, according to 2019 Social Security Administration statistics. Many of these people are likely fully retired, but some are probably working part-time to earn extra money. Others are likely still working full-time but couldn’t resist the allure of a monthly check from the government.
Anyone old enough to claim Social Security can do so, but depending on your age and income, you may be subject to a Social Security annual earnings test. Essentially, this is how it works if you are taking Social Security benefits before your full retirement age – the SSA will deduct $1 for every $2 you earn above its annual earning threshold. In 2021, the SSA earning threshold was just $18,960. The threshold is higher the year you reach your FRA, and then it goes away.
Line 29: American Opportunity Tax Credit
The American Opportunity Tax Credit is for educational costs you paid on behalf of you, your spouse, or any of your dependents. You can calculate it by completing Form 8863. The amount of the credit you’re entitled to appears on line 8 of Form 8863, and you would enter this amount on line 29 of your 1040 tax return.;
Taxation Of Social Security
Eligibility to collect Social Security benefits begins at age 62, though many seniors wait until a later age in order to collect larger benefit amounts. Whether Social Security benefits are taxable by the Internal Revenue Service depends on how much additional income the person filing taxes receives. Some states also assess taxes on benefits.
Withholding On 1099 Income
Income tax isn’t withheld from 1099 income in most cases, but some income sources from which it might be include:
- 1099-G, box 4: Withholding on unemployment income
- 1099-R, box 4: Withholding on retirement income
- SSA-1099, box 6: Withholding on Social Security benefits
- 1099-INT, box 4: Withholding on interest income
- 1099-DIV, box 4: Withholding on dividend income
- 1099-NEC, box 4: Withholding on miscellaneous and non-employee compensation
Line 31: Credit For Federal Tax On Fuels
Form 4136 reports federal taxes paid on gasoline and other fuels if you used the fuel for allowable non-taxable purposes. Your payment amount appears on page 4, line 17 of the form, and it’s also entered on line 11 of Schedule 3. The total from this section of the schedule is transferred to line 31 of your 2020 Form 1040.
How The Math Works
The math works like this:
- If your wages were less than $137,700 in 2020, multiply your earnings by 6.2% to arrive at the amount you and your employer must each pay for a total of 12.4%. If you were self-employed, multiply your earnings up to this limit by 12.4% to calculate the Social Security portion of your self-employment tax.
- If your wages were more than $137,700 in 2020, multiply $137,700 by 6.2% to arrive at the amount you and your employer must each pay. Anything you earned over this threshold is exempt from Social Security tax. You would do the same but multiply by 12.4% if you’re self-employed.
For taxes due in 2021, refer to the Social Security income maximum of $137,700 as you’re filing for the 2020 tax year.
When Seniors Dont Have To File Taxes On Social Security
If you are 65 years of age, single and have a gross income of $11,850 or higher you must file a income tax return or if your combined income including Social Security is $25,000. Although,; as previously mentioned, if you only receive Social Security Benefits as your sole source of income, then your gross income amount = 0, and you do not need to file in this case.
If youre a senior live mostly on social security but still receive other non tax-exempt income, as long as you stay under $11,850 you do not need to file a return. If any other income, other than Social Security Benefits is higher than $11,850, you will need to file an income tax return.
Students And Young Workers
Currently enrolled students who work at their university can be exempt from Social Security taxes. The exemption, though, only covers income earned from that job; any earnings from a second job off-campus will be subject to all taxes. The student exemption covers medical residents as well. The exception to the exemption? University employees, even those who later enroll at the college where they work. Children under 18 who work for their parents in a family-owned business also do not have to pay Social Security taxes. Likewise, people under 21 who work as housekeepers, babysitters, gardeners or perform similar domestic work are exempt from this tax.
When To Include Social Security In Gross Income
There are certain situations when seniors must include their Social Security benefits in gross income. If you are married but file a separate tax return and live with your spouse at any time during the year, then 85% your Social Security benefits are considered gross income which may require you to file a tax return.
In addition, a portion of your Social Security benefits are included in gross income, regardless of your filing status, in any year the sum of half your Social Security plus all other income, including tax-exempt interest, exceeds $25,000, or $32,000 if you are married filing jointly.
