When does Social Security become taxable and how is it determined?
Social Security counts as income and there are limits that make the benefits susceptible to taxation.
Some people will need to pay federal income tax on Social Security benefits, depending on the total income that they receive from a private retirement account or, in the case of surviving beneficiaries, possible employment. There is a limit to your combined income, and 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.
However, for individuals and married couples earning above this threshold, you will more than likely have to pay some tax.
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 levy a tax upon 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. Married couples who file separately will likely pay taxes on their benefits.
Read more on the 2023 COLA:
How can I calculate my combined income?
There is a fairly simple equation for working out your combined income and, therefore, whether you will have to pay taxes or not.
Working out your combined income
Your adjusted gross income + Nontaxable interest + ½ of your Social Security benefits = Your combined income
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 called Form SSA-1099. This form shows the total amount of benefits you received from Social Security in the previous year. With it, you will be able to “complete your federal income tax return to find out if your benefits are subject to tax.”
Additionally, the SSA allows beneficiaries to report their incomes quarterly to avoid a surprise at the end of the year. This may be beneficial to those on a fixed income, as coming up with additional funds can be quite difficult.
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 Form W-4V to the IRS.