Does Social Security count as income?
Programs overseen by the Social Security Administration provide support for around 70 million Americans, but do the payments count as taxable income?
Social Security benefits provide a vital form of support for elderly and vulnerable people in the United States and for many it is their only source of income. Once retirees begin to claim benefits, they will not be able to work at the same levels they had as they risk jeopardizing their benefit amount.
Do you have to pay taxes if you receive Social Security?
During tax season those who receive Social Security will have to calculate their combined income. This figure income includes the adjusted gross income (i.e. wages, salary, investments) and Social Security benefits as well as some types of non-taxable interest. After determining this amount, a beneficiary will know whether they need to pay taxes or not.
In most cases, those with a combined income under $25,000 ($32,000 for married couples) a year will not have to pay taxes on their Social Security benefits.
For those with a combined income between $25,000 and $34,000 ($32,000 to $44,000 for married couples) a year, the Social Security Administration may be able to tax up to fifty percent of your benefits. Finally, with an income over $34,000 ($44,000 for married couples), one can be taxed up to eighty-five percent of their Social Security benefits.
Bear in mind, this figures only relate to the proportion of the payments that can be taxed. This is different to the rate of tax that will be applied.
How will I know that I have to pay?
The Social Security Administration (SSA) will send a benefit statement each year in January to beneficiaries Form SSA-1099. With this form you will be able to “complete your federal income tax return to find out if your benefits are subject to tax.”
Additionally the SSA also allows beneficiaries to report their incomes quarterly to avoid a surprise at the end of the year. Another option includes having the agency withhold the taxes that would be owed when distributing your monthly payments. In order for the taxes on the benefits to be withheld you will need to submit a W-4V Form to the iRS.
Private retirement accounts
Many workers in the United States also pay into private retirement accounts like a 401(k) or a Roth IRA. These accounts differ in the way the funds put into them are taxed. Those who wish to pay taxes when they take out the money may choose the 401(k), while those who would rather pay the taxes now can choose the Roth IRA. As the recipient ages, money is impacted by inflation, meaning that the dollars taxed today are worth less than those that could be taxed in the future.