Basic Facts About Social Security|
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When to Retire and Collect Social Security Benefits
Most American taxpayers will become eligible to receive Social Security benefits on their retirement; benefits ordinarily start at one’s full retirement age — from age 65 to 67, depending on the beneficiary’s date of birth — although payments (at a reduced level) can begin as early as age 62. Alternatively, a retiree can opt to defer payments to age 70, at which time monthly benefits checks will be considerably larger than if one had begun collecting earlier.
However, your financial affairs in retirement involve more than just collecting Social Security benefits. You will hopefully have other sources of income — Social Security payments are capped at $2,513 (as of 2012), regardless of how much you earned during your working years. And, depending on your circumstances, this income may be subject to ordinary income tax.
Social Security Is Taxable
Retirees are often misled by taxation in retirement; they assume that their Social Security benefits will be tax-free. But is Social Security taxable? Unfortunately, in most cases it is. At the end of each year in which you receive Social Security benefits, you will receive a Form SSA-1099, which shows the total amount of your benefits for the year. Whether this income is taxable depends on your total income and your marital status.
Others Sources Of Income-‘Combined Income’
In most cases, if Social Security is your only income, your benefits will fall below the taxable threshold amount and you will not need to pay taxes, or even file a tax return. However, if you have other sources of income, you must determine your “combined income” for the year: this is your adjusted gross income (which you can calculate on a standard Form 1040 worksheet — the standard form for filing your federal tax return), plus any nontaxable interest income, plus one-half of your annual income from Social Security benefits.
If you file a joint tax return with your spouse and your combined income, as calculated above, is between $32,000 and $44,000, you will pay regular income tax on up to 50 percent of your Social Security benefits. If your combined income is greater than $44,000, then up to 85 percent of your benefits may be taxable. If you are married and file separately, you will also most likely have to pay taxes on your Social Security benefits.
If you file your federal taxes as an individual and your combined income, as calculated above, is between $25,000 and $34,000, then you may have to pay tax on up to 50 percent of your Social Security benefits. If your combined income is greater than $34,000, then up to 85 percent of your benefits may be taxable.
Regardless of your income, you will not pay federal tax on more than 85 percent of your Social Security income.
What about state taxes? Here, you may be in luck. Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming all have no state income tax — so you won’t be taxed on Social Security benefits or any other income you may have. Additionally, New Hampshire and Tennessee tax only certain kinds of income; Social Security benefits are tax-exempt in these two states. Several other states don’t tax any retirement benefits, whether Social Security or pension income. And many more states don’t tax Social Security, though they may tax other forms of retirement income.
In fact, 36 states plus the District of Columbia don’t tax Social Security — the 14 states that DO tax Social Security are Montana, North Dakota, Minnesota, Iowa, Missouri, Utah, Colorado, New Mexico, Nebraska, Kansas, West Virginia, Vermont, Connecticut, and Rhode Island. If you live somewhere other than these states, your Social Security income will be exempt from state tax.
If you prepare your own taxes, as tax preparation software package such as TurboTax will do all these calculations for you. If you prefer to use a tax service, they will of course have the information to tax your Social Security earnings appropriately.