You’ve paid into Social Security your whole life. Now it’s time to start collecting benefits. But did you know that you can get your benefits without paying any taxes? Read on to learn more about tax-free Social Security benefits.
Up to 85% of Your Social Security Benefits May Be Taxable
Depending on the size of your benefit and other income sources, you may have to pay federal taxes on up to 85% of your benefits. If you file an individual return, you will owe taxes if your “provisional income” is more than $25,000. If you are married filing jointly, you will owe taxes if your provisional income is more than $34,000. If you are married filing separately, you may owe taxes even if your provisional income is below these thresholds.
Your provisional income is your adjusted gross income plus any tax-exempt interest income plus one-half of your Social Security benefits. So, for example, if your adjusted gross income is $20,000 and you have $5,000 in tax-exempt interest income and $10,000 in Social Security benefits, your provisional income would be $35,000 ($20,000 + $5,000 + $10,000/2). This means that up to 85% of your benefits may be taxable if you are an individual filer with a provisional income over $25,000 or a joint filer with a provisional income over $34,000.
There Are Two Ways to Reduce or Eliminate the Taxes You Owe on Your Benefits
The first way to reduce or eliminate the taxes you owe on your benefits is to consider how much other income you have in addition to your benefits. If you can arrange your affairs so that your other incomes are below the filing thresholds (described above), then none of your benefits will be taxable.
Another way to reduce or eliminate the taxes you owe on your benefits is to take advantage of the fact that only a portion of your benefit is included in gross income for tax purposes. The formula for determining the taxable portion of benefits assumes that only 50% of those benefits are included in gross income. However, this percentage increases as your provisional income increases. For example, if 85% of your provisional income comes from sources other than social Security (e.g., pension payments), then 85%of each dollar of benefit payment received would be taxable—leaving only 15% tax-free! In short: The higher your other income sources (outside of SocialSecurity), the more likely it will be that a larger portion of each Social Security dollar will be taxed—but never more than 85%.
With careful planning, you can enjoy your Social Security benefits without paying any taxes on them. Speak with a qualified tax professional to see what options are available to you so that you can receive the full amount of benefits to which you’re entitled—tax free!