Tax on your Social Security? Yes, there is...

Many near-retirees may not realize part of their Social Security benefits could be subject to income tax.

For most of one’s working life Social Security is a tax so it might seem unusual to then pay a tax on the benefits that are eventually received. But, in fact, no income tax has been paid on the Social Security money paid in over the years by the employee or the employer.

Whether a recipient pays taxes on Social Security benefits depends on how much additional income the person receives, above and beyond their benefit. Taxes are never applied on all of the Social Security benefit no matter how much a person earns; the maximum amount ever subject to income tax is 85 percent of the benefit.

Whether taxes must be paid depends on the person’s combined income, which is the total of any salary or wages earned, pension benefits, investment income, tax-exempt interest and half of the Social Security benefit.

If combined income for a single person is between $25,000 and $34,000, up to 50 percent of the Social Security benefit is subject to tax. If the amount is more than $34,000, up to 85 percent of the benefit is taxable.

For a married couple filing jointly, the combined income limit is $32,000 to $44,000 for up to 50 percent of the benefit to be taxable and above $44,000 for up to 85 percent to be taxable.

Married couples filing separately will likely have to pay income tax on some of their benefit because there is no minimum income amount, says the IRS.

The percentage of the Social Security benefit on which income tax is applied is based on a sliding scale depending on how much outside income the person has. If a person relies solely on Social Security, no income tax will be applied.

Income taxes could be applied to other income besides Social Security benefits, to include investment income, depending on deductions and exemptions.

A person can elect to have income tax withheld from Social Security benefits by contacting the IRS and filing the tax withholding form. Withholdings can be made of 7 percent, 10 percent, 15 percent or 25 percent.

Source:  Karen DeMasters, Financial Advisor Magazine

The information contained in this article does not constitute a recommendation, solicitation, or offer by D2 Capital Management, LLC or its affiliates to buy or sell any securities, futures, options or other financial instruments or provide any investment advice or service. D2, its clients, and its employees may or may not own any of the securities (or their derivatives) mentioned in this article.

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