Q. When I signed up for Social Security recently, I was told that I might have to pay federal income taxes on my benefits. Is that true?
A. For better or worse, it’s true. And if you do have to pay, you won’t be alone. According to the Social Security Administration, about 40 percent who receive benefits have to fork out federal income taxes on a portion of those benefits.
The good news, sort of, is that you’ll never have to pay taxes on all your benefits. The taxable amount tops out at 85 percent.
Q. So how is the taxable amount determined?
A. The basic thing to know is that taxes are tied to what Social Security calls your “combined” income.
To determine that figure, take your adjusted gross income (that’s Line 37 on a Form 1040 tax return, or Line 4 on a 1040EZ) and add any tax-free interest that you have, such as interest from a municipal bond. Then add 50 percent of your annual Social Security benefit. You’ve now got your combined income.
If you file your federal tax return as an individual and your combined income is below $25,000, all your benefits will be tax-free. But if the number is between $25,000 and $34,000, you may have to pay tax on up to 50 percent of your benefits. There’s a sliding scale that determines the exact portion.
And if your combined income is more than $34,000, up to 85 percent of your benefits may be taxable.
If you file a joint return and you and your spouse have a combined income below $32,000, none of your benefits will be taxed. But at levels between $32,000 and $44,000, you may have to pay income tax on up to 50 percent of your benefits. And, if your joint income is more than $44,000, up to 85 percent of your benefits can be taxable.
As for the tax rate, the taxable portion of your benefit is simply added to your total taxable income and taxed at the same rate as such things as wages and pensions
Hoang Le Tax, Insurance & Financial Services
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