Social Security benefits are a crucial source of income for retirees, disabled persons, and their families. However, many people are unaware that their benefits may be subject to federal income tax.
Thresholds for taxation of Social Security benefits
The threshold for the taxation of Social Security benefits is based on your “combined income.” This is your adjusted gross income (AGI) plus any nontaxable interest income and half of your Social Security benefits.
For individuals, if your combined income is between $25,000 and $34,000, you may have to pay income tax on up to 50% of your Social Security benefits. If your combined income is more than $34,000, up to 85% of your benefits may be subject to income tax.
For married couples filing jointly, if your combined income is between $32,000 and $44,000, you may have to pay income tax on up to 50% of your Social Security benefits. If your combined income is more than $44,000, up to 85% of your benefits may be subject to income tax.
Relevant laws
The taxation of Social Security benefits is governed by the Internal Revenue Code (IRC) and the Social Security Act. The IRC sets forth the thresholds for taxation of benefits, while the Social Security Act provides for the collection and distribution of benefits.
Reporting Social Security benefits on your tax return
If you received Social Security benefits during the tax year, you will receive a Form SSA-1099 from the Social Security Administration. You must report the total amount of benefits you received on your tax return, regardless of whether they are taxable.
Know the rules
Understanding the taxation rules for Social Security benefits is essential to avoid unexpected tax liabilities. By knowing the thresholds for taxation and the relevant laws, you can make informed decisions about your retirement planning and avoid unpleasant surprises during tax season.
